Oil price revival ‘could reignite investor interest in shale sector’
Jeddah - Arab Today
The recently observed uptick in oil prices presents shale oil companies with a potential life-line, says a new report from Jadwa Investment.
According to the report, heavy cost-cutting measures, technological improvements and hedging allowed US crude oil production to remain positive in 2015. But this will not be the case in 2016, it said.
During the first quarter of 2016, US oil production saw its first year-on-year decline in eight years and this decline is expected to continue throughout the remainder of 2016.
The report, released by Jadwa Investment, states: “Falling oil prices resulted in a significant reduction in the US rig count but through various cost-cutting and efficiency measures shale oil companies improved well productivity, thereby stemming a major decline in oil production, until now. Latest data shows that production at the three major shale oil fields has peaked and so larger declines are forecasted going forward. ”
Despite this, the recently observed uptick in oil prices presents shale oil companies with a potential life-line. Not only does it raise the possibility of hedges being taken out again, a revival in prices could also see investor interest in the sector being reignited.
The report adds that a number of shale oil companies are restructuring under Chapter 11 bankruptcies, thereby prolonging oil production.
Concurrently, the number of drilled uncompleted wells (DUCs), all of which can be brought on-line relatively quickly, have risen in recent months.
Further, the report mentions that all of these developments mean that even as current oil and financial indicators point to declining production in the next two years, it is possible that actual production might turn out to be better-than-expected.
According to the report, the key reasons for the recently observed decline in unconventional oil production can be directly linked to the more challenging financial environment faced by shale exploration and production (E&P) companies.
Lower oil prices have wreaked havoc on E&P cash flows. Aggregated data on 61 listed E&P companies shows that cash flow from operations fell by 50 percent year-on-year in 2015.
In a period of high oil prices between 2010-14, many shale E&P companies took advantage of cheap and readily available financing to plug the funding gap between cash flow and capital expenditure. But this became increasingly more difficult to do in the last year.
Proved oil and gas reserves are the main assets underpinning how much E&P’s can borrow through leveraged finance.
As oil prices have dropped, so too have the value of these reserves, leading to a major write-down in E&P companies’ assets.
Consequently, banks have redetermined E&P companies’ reserve based-loans.
“Data from semi-annual redeterminations on 15 E&P companies, which together account for 8 percent of total US unconventional oil output. Since March 2015, we can see that reserve-based credit lines have been cut by 25 percent, or $3.75 billion,” said the report.
In its recent monthly report, the EIA stated that total US crude oil production fell for the seventh consecutive month to 8.98 million barrels per day (mbpd) in April 2016, a 7.4 percent decline compared to the same period last year.
Conventional US oil production has remained fairly flat in the last few years so the main contributor to this decline has been unconventional oil.
Two out of the three major unconventional oil fields (or plays), Bakken and Eagle Ford, which together contribute 48 percent of total unconventional production, have seen declines in production. Bakken saw a decline of 19 percent since its peak in December 2014 and Eagle Ford’s fall has been steeper, by 29 percent, since its peak in March 2015. Total declines in US unconventional oil could have been much steeper if not for the Permian play (40 percent of unconventional production).
While a decline in US shale oil will help to rebalance global oil markets, there will be no collapse in shale production, said the report.
Shale oil has shown remarkable resilience in the last few years and the industry has continuously adapted by lowering overall costs, said the Jadwa report.
In fact the recently observed uptick in oil prices presents shale oil companies with a potential life line. Not only does this raise the possibility of hedges being taken out again, a revival in prices could also see investor interest in the sector being reignited.
In addition, an increasing number of shale oil companies are restructuring under chapter 11 bankruptcies, thereby prolonging oil production, and the number of DUCs that can be brought on-line have also risen.
All of these developments mean that even as current oil and financial indicators point to declining production in the next two years, it is not totally out of the realms of possibility that actual production turns out to be better than expected, said the Jadwa report.