Oil price discussion and analysis

[ducati916]

Further issues:

Oil-producing countries at risk of downgrade. The collapse of oil prices could set off a wave of sovereign credit downgrades. Countries like Saudi Arabia, Iraq, Oman, Nigeria and Angola are at most risk.

jog on
duc

 

[rederob]

1. Incorrect. But the 'reason' is now unimportant. That is the entire point in buying distressed assets.

2. If the price to be paid does not create a profitable asset, it will not be purchased.

3. That is not a price that I said was required for distressed assets to be profitable. However, an estimation of the aggregate price ($45-$55) will allow a calculation as to how profitable the potential is.

4. So what. That is the entire point when buying a distressed asset, you get it cheap.

5. That is a speculation that is being tested as we speak. I think it will fail for economic axioms. However we shall see.

jog on
duc

Here's why your analysis is so poor:
1. You claimed that an asset that cannot meet its financial obligations is not distressed, then say "the 'reason' is now unimportant," and then follow it with a baseless conclusion.
2. You cannot know beforehand if an oil patch that was previously unprofitable at a higher oil price and now requires new wells to be drilled to determine capacity will ever be profitable. Your claim has no logical merit.
3. The point is that until you have drilled new wells you do not even know what you are dealing with. The oil price becomes a secondary consideration. Brownfield purchases can only be determined to profitable in advance if you have all the metrics at your fingertips, and the distressed asset does not give you the data you need.
4. Buying anything cheaply does not of itself confer the purchaser a profit from the transaction.
5. Your link suggests that less than 20% of the USA's LTO output is hedged at an average $56/bbl excluding the average 12% royalty at well head. The maths give an average oil price of around $40 for the average hedged producer, which most analysts suggest is unsustainable. Clearly those who are not hedged are now haemorhaging. Economic axioms do not trump real world bankruptcies.

 

[ducati916]

Here's why your analysis is so poor:
1. You claimed that an asset that cannot meet its financial obligations is not distressed, then say "the 'reason' is now unimportant," and then follow it with a baseless conclusion.

2. You cannot know beforehand if an oil patch that was previously unprofitable at a higher oil price and now requires new wells to be drilled to determine capacity will ever be profitable. Your claim has no logical merit.

3. The point is that until you have drilled new wells you do not even know what you are dealing with. The oil price becomes a secondary consideration. Brownfield purchases can only be determined to profitable in advance if you have all the metrics at your fingertips, and the distressed asset does not give you the data you need.

4. Buying anything cheaply does not of itself confer the purchaser a profit from the transaction.

5. Your link suggests that less than 20% of the USA's LTO output is hedged at an average $56/bbl excluding the average 12% royalty at well head. The maths give an average oil price of around $40 for the average hedged producer, which most analysts suggest is unsustainable. Clearly those who are not hedged are now haemorhaging. Economic axioms do not trump real world bankruptcies.

1. Nonsense. What I said was:

Given that they are buying distressed assets, they should be accretive over time to the bottom line. Buying the Majors in this decline should work out well over time.

2. They have failed to return a profit because the assets were too expensive. Lower the price (distressed sales) and they can be profitable.

4. Banks have stopped lending on this class. That is the point. That is why the Majors can buy select assets at fire-sale prices.

The original owners (investors) overpaid. They incurred losses and are now selling distressed assets. Those distressed assets will be cheap(er). That lower price can make the asset profitable.

2. But again, it depends on the price paid for that asset. If you pay pennies on the dollar, there is every likelihood that it can be profitable.

3. See above.

4. No it does not. But it certainly improves the odds.

5. From the article:

Looking at the hedging positions of the considered companies, we conclude that they hedged almost 50% of their guided 2020 output at an average price floor of $56 per barrel.

“The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” says Artem Abramov, Rystad Energy’s Head of Shale Research.

So, depending on how long the Arabs can maintain their own losses (reduced revenue) will see how this plays out.

I'll address the 'axioms v bankruptcy' is a separate post.

jog on
duc

 

[rederob]

1. Nonsense. What I said was:

Given that they are buying distressed assets, they should be accretive over time to the bottom line. Buying the Majors in this decline should work out well over time.

2. They have failed to return a profit because the assets were too expensive. Lower the price (distressed sales) and they can be profitable.

4. Banks have stopped lending on this class. That is the point. That is why the Majors can buy select assets at fire-sale prices.

The original owners (investors) overpaid. They incurred losses and are now selling distressed assets. Those distressed assets will be cheap(er). That lower price can make the asset profitable.

2. But again, it depends on the price paid for that asset. If you pay pennies on the dollar, there is every likelihood that it can be profitable.

3. See above.

4. No it does not. But it certainly improves the odds.

5. From the article:

Looking at the hedging positions of the considered companies, we conclude that they hedged almost 50% of their guided 2020 output at an average price floor of $56 per barrel.

“The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” says Artem Abramov, Rystad Energy’s Head of Shale Research.

So, depending on how long the Arabs can maintain their own losses (reduced revenue) will see how this plays out.

I'll address the 'axioms v bankruptcy' is a separate post.

jog on
duc

You simply do not get it because you do not understand what is being purchased. You cannot make a purchase that was not profitable all of a sudden profitable because you bought it cheaply. There is zero logic to the idea, and even less when you understand the steps of the process in regard to LTO plays, which are very different to CO.
This is sobering reading and was written months before the collapse of oil prices.
The statement that “The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” is not well founded (excuse pun) as I have already demonstrated and is reiterated in my previous link. To presume that 80% of unhedged LTO output can survive sub-$40 oil is unrealistic. Production costs vary considerably, but according to Dayen, “the best players in the Permian Basin need crude north of $50 a barrel in order to be cash flow positive.”

 

[ducati916]

1. You simply do not get it because you do not understand what is being purchased. You cannot make a purchase that was not profitable all of a sudden profitable because you bought it cheaply. There is zero logic to the idea, and even less when you understand the steps of the process in regard to LTO plays, which are very different to CO.


2. This is sobering reading and was written months before the collapse of oil prices.
The statement that “The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” is not well founded (excuse pun) as I have already demonstrated and is reiterated in my previous link. To presume that 80% of unhedged LTO output can survive sub-$40 oil is unrealistic. Production costs vary considerably, but according to Dayen, “the best players in the Permian Basin need crude north of $50 a barrel in order to be cash flow positive.”

1. Yes, that is exactly what can happen. If the original purchase of asset 'X' cost $100 and needed an oil price of $50 to be profitable: then a purchase price of that same asset priced at $10 does not need oil to be priced at $50 to be profitable. It can be (oil) priced lower.

That is what has been happening and will likely continue to happen: there will be significant consolidation in the industry. The high cost producers are and will, go out of business.

2. The situation is that some of the higher cost producers have hedged their production for somewhere between 6 months and a year.

The question therefore becomes: can the Arabs maintain this level of production, or higher, to keep prices at $30 or less?

In my opinion, the answer is no...not even close. As these smaller producers go bust, supply will contract, putting upward pressure on prices. The Arabs have to increase their supply further to keep prices down. So it goes until what is left are companies that can produce profits at $30 or less.

Second, at some point, COVID-19 runs its course. Economic activity picks up. Demand returns. Supply has been curtailed, prices rise.

In the longer term, the Arabs are doomed to failure. Longer term being circa 1yr, possibly less. We will then see prices aggregate somewhere around that $50-$60 mark. If supply is badly damaged for whatever reason...then we may see a price spike higher.

jog on
duc

 

[rederob]

1. Yes, that is exactly what can happen. If the original purchase of asset 'X' cost $100 and needed an oil price of $50 to be profitable: then a purchase price of that same asset priced at $10 does not need oil to be priced at $50 to be profitable. It can be (oil) priced lower.

That is what has been happening and will likely continue to happen: there will be significant consolidation in the industry. The high cost producers are and will, go out of business.

2. The situation is that some of the higher cost producers have hedged their production for somewhere between 6 months and a year.

The question therefore becomes: can the Arabs maintain this level of production, or higher, to keep prices at $30 or less?

In my opinion, the answer is no...not even close. As these smaller producers go bust, supply will contract, putting upward pressure on prices. The Arabs have to increase their supply further to keep prices down. So it goes until what is left are companies that can produce profits at $30 or less.

Second, at some point, COVID-19 runs its course. Economic activity picks up. Demand returns. Supply has been curtailed, prices rise.

In the longer term, the Arabs are doomed to failure. Longer term being circa 1yr, possibly less. We will then see prices aggregate somewhere around that $50-$60 mark. If supply is badly damaged for whatever reason...then we may see a price spike higher.

jog on
duc

Read this very carefully as I have said it before and will not repeat it.
Until you drill new wells on the patch you cannot determine whether or not it is possible to turn a profit.
It is a gamble.
You only know that significantly elevated prices were insufficient, and that these were based on the strongest flows (wells decline between 75-90% in the first three years, and field declines without new drilling typically range from 25-50% per year).
You appear to not understand how these metrics initially led to the asset being distressed and somehow think that the underlying nature of the asset remains intact if repurchased cheaper.
I repeat that I find your analytical abilities deficient.

 

[Smurf1976]

Hedges offer shale drillers a lifeline. A study of 30 shale drillers accounting for 38 percent of total U.S. oil production finds that roughly 50 percent of their output is hedged an average price of $56 per barrel.

In that case the effect of low prices would be to stop new developments but not to really harm the operation of existing production.

In that case, it'll be a slower decline in output compared to a scenario where existing producers go broke.

 

[rederob]

In that case the effect of low prices would be to stop new developments but not to really harm the operation of existing production.

In that case, it'll be a slower decline in output compared to a scenario where existing producers go broke.

I cannot see that as the case.
Output will cease as costs cannot be recovered by the operators.
Furthermore, a point not previously made is that the heaviest debt burden is presently carried by those companies providing infrastructure/services.
For the last few years I have been following the shale oil story and there are 2 competing camps amongst those who contribute to forums. The data heavily sides with shale oil being a very risky business, with luck playing a huge part in profitability as fracking costs are incredibly high. What forum contributors tend to overlook, however, are the separate costs of exploration and corporate overheads. So when you see breakeven costs of $50/bbl in the Permian (according to the Federal Reserve Bank of Dallas), it applies only to the producing well, and reflects the lowest breakeven prices achieved (not the average).

 

[Smurf1976]

I cannot see that as the case.
Output will cease as costs cannot be recovered by the operators.

If they've hedged their production then, assuming the nature of those arrangements require physical delivery (acknowledged that's an "if"), nothing has really changed in the short term. However profitable it is or isn't, there's no immediate change if they're fully hedged.

For anyone wanting to develop new production though they'd be completely out of luck given that nobody's likely to enter any sort of hedging arrangement at double the current spot price.

 

[ducati916]

1. Read this very carefully as I have said it before and will not repeat it.

2. Until you drill new wells on the patch you cannot determine whether or not it is possible to turn a profit.
It is a gamble.

3. You only know that significantly elevated prices were insufficient, and that these were based on the strongest flows (wells decline between 75-90% in the first three years, and field declines without new drilling typically range from 25-50% per year).

4. You appear to not understand how these metrics initially led to the asset being distressed and somehow think that the underlying nature of the asset remains intact if repurchased cheaper.
I repeat that I find your analytical abilities deficient.

1. Ok, let me put my glasses on.

2. OMG....that just leapt off of the page. However, if you have paid pennies on the dollar for an asset that becomes a much better gamble. Think about it: your costs are (a) cost of the land/asset and (b) extraction costs: (b) is more or less consistent but if (a) is low then your breakeven costs will be lower, that is simple arithmetic.

3. You are talking about 2 totally different positions: (a) new land/asset and (b) already existing well. If (b) and you pay less, your breakevens are lower. If you are buying an already depleted asset for residual flow, you'll pay virtually nothing.

4. Give it a rest.

jog on
duc

 

[qldfrog]

If they've hedged their production then, assuming the nature of those arrangements require physical delivery (acknowledged that's an "if"), nothing has really changed in the short term. However profitable it is or isn't, there's no immediate change if they're fully hedged.

For anyone wanting to develop new production though they'd be completely out of luck given that nobody's likely to enter any sort of hedging arrangement at double the current spot price.

One devil thought:
Could the Saudis and Russia have edged part of their output before moving into that price war?
That would be diabolical and silly for edge providers but
with neg interest rates, 2 months ago, money did not know where to go...
Banks would be the great losers now....until they collapse..then what become of edging contracts?

 

[ducati916]

COT



Commercials are still (currently) supportive of price.

jog on
duc

 

[fiftyeight]

This thread may be a better place to ask about hedging.

Once the tanks are full, there must be a limit to how far out and how much of your production you can hedge or would want to hedge at these current prices?

Surely when the big boys entered into a price war they knew this and have planned to keep price low until hedges expire.

 

[rederob]

If they've hedged their production then, assuming the nature of those arrangements require physical delivery (acknowledged that's an "if"), nothing has really changed in the short term. However profitable it is or isn't, there's no immediate change if they're fully hedged.

For anyone wanting to develop new production though they'd be completely out of luck given that nobody's likely to enter any sort of hedging arrangement at double the current spot price.

The physical producer may have gone belly up and closed shop. In that case the owner of the contract needs to source the oil from elsewhere to meet their obligation.

Some useful info and links from The Hill last week:

"Moody’s estimates that the U.S. oil and gas industry has almost $90 billion of rated debt coming due in next few years. Most is junk or rated just above junk, according to CNBC. Well before COVID-19 became a household name, the industry faced a wave of bankruptcies.
Oil companies, for example, have simply walked away from more than a million uncapped oil and gas wells across the country, leaving governments to try to plug the wells and clean up the drill sites...."
​

Here's the best recent data I could find as a chart on LTO breakeven costs:

The breakeven applies only to the cash costs associated with those wells drilled and excludes other overheads, such as sustaining capital/loan expenses, exploration expenses, general/admin expenses and site rehabilitation costs. As there is no way to attribute these additional costs to the above chart, here's a snapshot from the gold mining sector that shows they can add up to 40% more:

 

[Smurf1976]

This may cushion the situation slightly. Don't really know how the market will react though.

Physical space in the SPR is 77 million barrels currently unused so that's what's available to be filled.



https://www.energy.gov/sites/prod/files/2020/03/f72/Memo from the Secretary to Assistant Secretary Winberg.pdf

 

[rederob]

There is no doubt that right now there is a glut of oil sloshing around global markets as the transport sectors are grinding to a halt.
Some analysts are tipping POO in the teens, and they will probably be right.
The patches to watch closely will be US shale regions, as even those with hedges as discussed previously will not be profitable once their other overheads are taken into account. As it stands, the present POO is less than this chart's cheapest producing well's breakeven cost, and the trend remains firmly downwards. Very few LTO producers are going to survive this, which in a fashion is a bonus for our bigger Oz conventional crude plays which are still profitable in the teens (eg Santos has unit production costs of about 7.50/boe and Beach is under $12/boe).
Here's POO mapped over the past 20 years:

 

[Dona Ferentes]

Smokin' OPs

 

[Smurf1976]

Whilst this discussion focuses on the price of crude oil, there's also a looming issue with specific products since the demand decline will not be uniform and refineries have only modest ability to shift production around in the short term.

It's a fair assumption that jet fuel consumption is going to drop sharply for example so that'll upset the economics of refining. They can shift production more toward other products to some extent but that capability isn't unlimited whereas demand destruction for jet fuel in particular looks to be pretty brutal at the moment.

 

[rederob]

An immediately contradictory reaction of producers of almost anything when prices collapse is to produce more so as to achieve cash flow and remain in business. I expect this is the same with the oil market.
Unlike previous POO bottoms which quickly recovered, the present market literally has nothing to sell in to, unless they have the USA's SPR (as per @Smurf1976's post above) as a life raft.
Nevertheless, those USA LTO producers who have been struggling to cover costs for some time are merely crystalising increased losses by selling in to the SPR, and it's not a bottomless pit anyway.
Here's where POO's presently heading:

 

[ducati916]

There are 2 factors that account for the current price of oil:

(a) COVID-19; and
(b) Price war within OPEC.

Neither will last. When they end, POO will recover.

In the interim, will there be casualties? Yes.

That in itself will contribute to the recovery in POO. In fact, the greater the destruction, the higher could be the POO...essentially a price spike in the opposite direction.

jog on
duc