The Bears and Bulls Draft a 2H Picture

The Bears and Bulls Draft a 2H Picture
Private energy companies are faced with the same challenges that have confronted big players in the first half of 2015; industry experts talk with Rigzone about how the rest of the year will shake out.

After a tumultuous 2015 of seesawing oil prices, gut-wrenching declines in the stock market driven by skittish investors and halting hope curtailed by bloody geopolitics that seem beyond anyone’s control, the ever-optimistic energy industry is now holding its breath in assessing the second half of a long year.

What can we expect?

“More tumult,” said Terry Marshall, senior vice president for the corporate finance group at Moody’s Investors Service. “Oil prices will continue to be volatile after the relative stability at $65 in Brent, but there is a lot of uncertainty in the world with what’s happening with Iranian sanctions, the market reactions to a potential default by Greece and a slowdown in Chinese demand. And the fundamentals: oil supply that will continue to weigh on the market.”

Terry Marshall
Terry Marshall
Senior VP for Corporate Finance Group, Moody’s Investors Service

He told Rigzone that in the first half of the year, companies that had hedged out their prices were protected and a healthy second-lien market emerged. That’s slowed an expected strong mergers and acquisitions trend, but that, too, is expected to lessen in the waning months of 2015 as hedges expire and commodity prices remain low.

And it’s in these months that companies who’ve made the cuts and reduced what’s redundant might be more willing to sell.

“I’ve been surprised to see it’s been so slow,” said John Lee, professor and Hugh Roy and Lillie Cranz Cullen Distinguished University Chair at the University of Houston, told Rigzone. “I think it will pick up because there are some companies with cash flow problems and they’re going to be seeking buyers. And there are companies, including big companies, with lots of cash available that view times like these to make acquisitions, so I think the situation is ripe for mergers and acquisitions.”

Some shale players have been able to make $60 oil work in the more economic basins where producers can simply move rigs from one pad site to another, but in much of July, oil has hovered in the $50s.

Companies that are just on the edge of being economic at $60 oil aren't likely to work at $50 oil, Marshall said.

It’s probably not wise to make too many predictions, Lee said, but barring any major incident, the fundamentals of the second half of 2015 probably won’t look too different than those of the first half.

Downsizing for the Right Size

Up and down the energy supply chain, there are stories like those of Geotrace Technologies Inc., a Houston-based service company that has responded to the current markets by tightening their belts. CEO Bill Schrom told Rigzone that his company, a private enterprise founded in 1979, has shut down or scaled back marginal operations and reduced its workforce by 35 percent.

“At this point, we feel pretty confident we’ve kind of right-sized, but we’re playing wait and see. We’re finding that a lot of clients have no budgets, or budgets that have to get looked at again — they have to continuously examine them — so it’s really hard to read what the clients are going to do. Part of it is just trying to get through this year and hopefully, with a new budget cycle next year, we’ll get a little bit better visibility on activity,” Schrom said.

“I think we’ve seen the worst of the fall in the first half of the year.”

To that end, Schrom may be right on target. In a recent webinar for investors, Evercore ISI said there are early signs of a recovery at work. Operators are announcing additional rigs, and mid-year CAPEX spending is expected to increase. Plus, Evercore noted, permitting activity has increased with the summer months.

Still, Schrom said, it all comes down to fundamentals — the price of oil — and stability.

“Our clients can generally make decisions if they know what prices are going to be so they can do their economics, so $60 works, $50 works. I think $40 would be harmful, but I think between $50 and $70, as long as there’s reasonable stability in price, we’ll have activity.”


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Philippe  |  July 23, 2015
The US shale oil production has increased in 2015 from 2014. The main reason is technically how shale production is managed. Technically the initial cracking of the geological formation releases the oil or gas locked in the shale bearing rock formation. The reason that well operators used sand or proppant was to improve well productivity at relatively low cost. The main task of sand grains used as proppant is to hold open the tiny fractures introduced into shale bearing rock by high pressure fracking. Proppant has two tasks in the fractures – called conductivity and reservoir contact. Conductivity is the flow capacity created to allow fluid to move through the fracture and is generally improved by increasing the quality of the proppant (roundness and crush resistance or by ceramic coating). Newly producing Fracking well produces what is called “Initial Production” or IP. This IP production last for 12 to 18 months. The later stage of production called the Estimated Ultimate Recovery or EUR may last several years but at a fraction of the IP production. Some proppant is crushed and oil or gas flow resistance reduces the production. The oil crash happened about 9 month ago. Many US shale fracking wells are still in the IP production. Many EUR wells not profitable have been shut down to keep profitability. The US shale production is approaching the end of the IP production. To keep production stable new IP wells must be completed. This is why the rig count is increasing. The investment needed to keep wells maintained is similar for 2 wells or 10 wells the equipment usage is the key to profitability. Aside from the technic used to produce oil or gas, the price of oil and gas are intrinsically set by the budget needs of OPEC. Few OPEC members make enough profit to fund the social need of their population. At some point the price of crude oil will have to be balance with the social population needs. In conclusion, we are sooner than later at the beginning of rebound, although slow rebound.