Statoil releases a "climate roadmap" as Shell warns that public faith in fossil fuel industry is disappearing.
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Statoil releases a "climate roadmap" as Shell warns that public faith in fossil fuel industry is disappearing.
"Statoil aims to cut carbon emissions per barrel of oil produced from 10kgs today to 8kgs by 2030, declared the firm's president and chief executive, Eldar Sætre."
'We need an updated strategy if we’re staying in the oil game. Not a new one, mind you – the plan I’ve laid out for the long-term trends in oil is, I think, going to be the absolute right one – but an adjustment for the trader in our midst is necessary.
I’ve been clear about what I believe is the most prudent way to invest in the sector – banking on a very slow rebound in oil prices can make for some conservative picks in energy companies that I believe are going to rebound best from the ‘shale bust’ . You’ve heard me talk often about EOG Resources (EOG), Cimarex (XEC) and Anadarko (APC), three names that are nearing value numbers again, by the way, on the back of the David Einhorn short recommendation.
But there have also been others that I’ve mentioned; other shorter-term strategies that could be employed, to find quick trades that don’t need to be held forever. These include some of the dedicated shale players with less than stellar balance sheets and some sub-sector oil plays that are often left off the radar screen. Let’s look at some of these now.
For a shorter-term play on shale players, you’d want to find those with good assets but fairly distressed debt positions, making their future rocky – but with enough cash to make their possible demise less clear. These three qualities allow the speculator to mark time as the crude markets play themselves out.
With every small rally in crude, the optimism of the “end” of the bust cycle allows these ‘less than stellar’ oil companies to rally when other smaller, more cash poor players will not. Examples of these types of stocks are Oasis Petroleum (OAS) and Northern Oil and Gas (NOG). These two have shown the capacity to rally strongly as crude has found a level above $55 in a way that even the strongest E+P’s previously mentioned have not. I have talked about, and traded, Oasis before and the shares have worked out well as a trading device between crude levels.
One other place to go is outside the shale players but in the most distressed of oil production sectors – offshore. Again, this is an idea I’ve mentioned before but is turning out to be a great trading vehicle as well, as oil bounces around between $50 and $60. The reason for this is the inevitable health of the deep-water sub-sector: While we can talk about the consolidation and survivors of shale, and choose who might or might not make it through, we do know that at some point the world will have to return to offshore drilling prospects.
In this, there are but a handful of companies capable of these specialized operations, and unless bankruptcy is a real risk, the drop in the drilling cycle, and even the capital losses, are only temporary setbacks. Put that together with almost single digit stock prices and you have a very volatile trading vehicle that is far more likely to go up than go down with every move higher in crude.
Two good examples of this would be Transocean (RIG) and Seadrill (SDRL). Seadrill continues to be a core long-term holding of mine but is still useful for short-term trading shares as well. Despite the likelihood of the deep-water cycle showing no sign of improving until mid-2016 at the earliest, Seadrill shares have shown an equally good ability to respond with fast, juicy gains corresponding to moderate increases in oil’s price.
I tend to want to advise investors for the long-term, but I know there are lots of shorter-term traders out there looking for places to play. If you’re that type of trader, here are two of the best right now.
Source . oilprice.com
'With every small rally in crude, the optimism of the “end” of the bust cycle allows these ‘less than stellar’ oil companies to rally when other smaller, more cash poor players will not. Examples of these types of stocks are Oasis Petroleum (OAS) and Northern Oil and Gas (NOG). These two have shown the capacity to rally strongly as crude has found a level above $55 in a way that even the strongest E+P’s previously mentioned have not. I have talked about, and traded, Oasis before and the shares have worked out well as a trading device between crude levels. '
Source : oilprice.com
Petrobras has set a new Brazilian record for exploratory drilling by reaching a water depth of nearly 3,000 meters, the state-controlled oil giant said. The 3-BRSA-1296-SES well was drilled to a water depth of 2,988 meters - eight meters more than the 3-SES-184 well Petrobras drilled in February in that same basin - and a total depth of 6,060 meters.'
'Only six wells in the world exceed the depth of 3-BRSA-1296-SES, three of which were drilled by India's Oil and Natural Gas Corporation in that South Asian nation and three by U.S. energy companies Murphy Oil and Chevron Corp. in the U.S. Gulf of Mexico, Petrobras said..´'
Outside of individual's holding oil stocks, damage to the economy from the fall in oil has been pretty minimal so far. Indeed, the price cut in home heating oil and gasoline has probably outweighed the damage from lower oil prices… so far. Unfortunately, this situation may not last.
Analysts are starting to look beyond the boost to the economy from low oil prices and see the damage that is being done by worker layoffs, slowing business, and falling home prices in oil producing states. Indeed, one recent estimate suggested that up to four jobs could ultimately disappear for every one job lost in the oil sector.
There is little doubt that as oil prices fall, some people working in that sector will lose their jobs. What is less clear is the impact those job losses will have on other sectors of the economy. Since one person's spending is another person's income, as people lose their jobs in the oil patch, that should mean less spending at the local grocery store, restaurants, etc. Now of course, this fall in spending is partially offset by a rise in incomes from the fall of gas prices. But that gas price benefit is spread out all across the country, whereas the damage from the fall in oil prices is localized to certain areas with a lot of oil. Overall then, it's not clear how large the damage will be from oil's price collapse. But we do have a model to look to in this case: Australia.
Australia went through a mining boom over the last fifteen years that created a large new upper middle class. People working in Australian mines worked hard, but earned excellent wages and spent that money liberally. Stories of blue collar people with high school educations earning $200,000 a year and spending that money like water were common. The same thing has started to happen here in the US. Vice President Joe Biden recently extolled the virtues of new middle class jobs that could be created in the energy industry, especially around updating the country's infrastructure. Over time, if a lot of these types of jobs are created it can have a dramatic effect on an area, as Australia demonstrates.
Now though, that cycle is working in reverse. As oil prices have fallen, so too have the profits for oil companies and all the other companies in the oil supply chain. The process has been so fast that the economic damage probably has not been felt yet – almost like being injured and not realizing it due to adrenaline. Here again, Australia provides an economic model, and it looks like the damage in oil producing states could end up being widespread and long-lasting.
If the average oil producing metro area has 3% of workers employed in the energy sector and a third of these folks lose their jobs, then that implies an extra 1% of unemployment. That is not bad, but if that 1% of workers are supporting an additional 4% of workers (using the 1:4 rule analysts found), then that would mean a total of 5% in additional unemployment. This could easily lead to 10% unemployment up from a normal 5% rate. That level of unemployment would have a severe long-term effect on house prices, sales tax receipts, economic growth in the area, etc. This is exactly what Australia is experiencing right now. So while the short-term impacts of oil's decline have not been too bad, it certainly looks like there is more pain to come.
Unfortunately, as helpful as the energy sector was in buoying the county during the Recession of 2008, the energy sector may now hold down the economic expansion just as the economy is starting to pick up steam.
By Michael McDonald of Oilprice.com
The upstream oil and gas industry is not a black hole. There's no mystery wrapped in an enigma here.
There are a lot of meetings with engineers, chemists and geologists. There's a constantly evolving learning curve. And then there's all the regulations and compliance. But all-in-all it's pretty straight forward, that is, until the media gets a hold of it. That's when it becomes complicated. It's as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don't have a chance. So, in a small effort to set the record straight, let's see if we can't dispel some of the misinformation.
Misperception #1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires. Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We're not going into the 20s).
Misperception #2: The "non-productive rigs" are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. H&P's Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract. Have a drive past H&P's Odessa yard. It's stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You're not going to bring in a dozen or so tractor trailers and a few cranes for a rig move back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas—that have not been let go—will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat's ass in the first place.
Misperception #3: Supply keeps coming on because of innovations in fracking. Yes, fracking has gotten much better in shale formations but the real advances are already baked in. What has been occurring over the last 24 months or so is that more sand is being run per stage and stage intervals are more densely packed. Other than some new chemistry and a few software updates, that is the bulk of it. There really is no smoking gun between well completions in July 2014 when oil was at $100 and now--9 months later--when oil has been cut in half.
Misperception #4: Fracking has not gotten exponentially more efficient resulting in outsized cost reductions. Yes and no, but more "no" than "yes." The 600 lb gorilla in the room is competition. Fracking has gotten competitive, damned competitive. Five years ago fleet sizes were smaller and there were nowhere near as many players. But then came the boom and service companies did what they do best. They overbuilt. They were also cheered on by cheap and plentiful money because everyone, especially bankers and private equity, wanted in on this one. To get an idea of just how competitive the shale landscape has become, a stage in a 2012 Marcellus well fetched almost twice the same stage today. There have been multiple improvements in both design and implementation, but the heavy lifting on cheaper frack pricing has been competition.
Misperception #5: The Baker Hughes rig count has become irrelevant. Incorrect. The Baker Hughes rig count is always relevant. Remember, this was the weekly number that allowed us to hold a bottom at $43 in March. But because supply didn't immediately go lockstep with the falling count, analysts lost patience. They are now theorizing that rigs are so "productive" that the count no longer carries the weight that it once did. That's a tough position to take. We were at 1,600 rigs drilling for oil in October and we're now at 800. There is some truth that E&Ps are now favoring sweet spots but that won't make up for the 50% collapse in the count. Shale extraction resembles an industrial process more than it does wildcatting. There aren't many dry holes with shale. Microseismic advances have put an end to that as have data rooms stuffed full of old well logs that chart the potential of shales. Thus, most shale wells drilled today have a much better chance of being economic than step out and exploratory wells of the past. There is no legitimate model for 800 rigs growing US production past 8.9 mm BOPD in the Lower 48. And because its shale, and because shale is "tight", drilling must continue at a breakneck pace to grow production. Analysts looking for a more ‘spot on' number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production.
Misperception #6: We are running out of storage space for crude. We're not. We're going to be OK. Volumes have increased, especially at the oft mentioned Cushing, but Cushing accounts for only about 10% of US storage. Other storage areas are up but nowhere near as much. The reason is that physical traders like to park their inventory close to market and Cushing gives them that proximity. Also, Cushing is not a dead end. There are large pipelines that connect it to the Gulf Coast where storage is more plentiful and not nearly as full. Additionally, large inventory draws will be coming shortly with the advent of warmer weather.
Misperception #7: Shale wells have a productive life of only a few years. The truth on this one is slowly being sorted out and commentators are finally getting it right. Shale lacks permeability. Which means it's very "tight". It requires a frack job to free up the oil and gas trapped in its pore space. Fracking creates and sustains permeability and permeability is the pathway to the wellbore. Like any tight formation, oil and gas production is front loaded, meaning that most production will come right after stimulation. This results in excellent up front results but production tails off quickly, maybe even falling as much as 75% in year one and settling into something less for the next 10 or 20 years. This is called the tail and the tail is profitable, but only if the flush pays for most of the well.
Misperception #8: You can turn shale on and off. That's wrong. Shale takes time like any other industrial activity. Slowing down its progress is a bit like stopping a supertanker. You can do it, but you need a lot of room. Most drillers require contracts and breaking them can be painful. Sand can pile up at rail sidings and result in demurrages. Layoffs can take time. Regulatory penalties may force an operator into activity whether he wants activity or not. All this takes time to work out. And then there's always the stronger balance sheets that will drill regardless of price or that will drill and create a "fracklog" which is a newly minted MBA speak for a backlog of wells to frack. There is no switch you can flip.
Misperception #9: Oil is inversely related to the dollar. It is. This was a head fake. It's not a misperception. Match the DXY to Brent and WTI over the last 12 months. It's a perfect divergence. You want to bet on oil, then bet on the Euro.
Misperception #10: OPEC is done. Maybe, but the Gulf Cooperation Council is not. Collectively, the 4 GCC members pump more than half of all OPEC production. They also have very low lifting costs and enormous cash reserves. Additionally, they have stamina and are going to maintain OPECs position of no cuts. There's a long history of Russia or Venezuela filling reduced quotas. This time around the GCC is not going to let that happen. If Russia concedes there may be a cut in June. But it is looking unlikely even if they do. Look for Saudi Arabia to pick up market share.
Misperception #11: American shale producers are the new swing producers. No, their banks are.
Misperception #12: A deal with Iran will lower prices. Sort of. It will take Iran a year or two to add anything meaningful to our 93 MMBOPD global market but the fear of a nuclear Iran will create enough tension to offset the supply addition. Worries over a nuclear Iran, whether real or perceived, will create enough fear in the markets to more than counter balance the additional million barrels a day of supply that may come on.
In short, oil prices will increase as weekly EIA production numbers begin posting declines as we saw last week. Demand will increase. Inventories will start getting eaten into by midyear. Europe will contribute as will Asia and the Middle East. A shrinking Chinese market is still growing at 7% a year, and that market is much bigger now than when it was posting 10% yearly growth five years ago. Rich Kinder was right in calling the bottom in the low 40s and John Hofmeiser (former President of Shell Oil) and T. Boone Pickens are probably pretty close to being right with their call of $80 as the top in the next year or so. A solid $65 to $70 by year end is the more reasonable number and is just enough to hold off development of some offshore projects, oil sands work and a good amount of the non-core shale plays. A stronger dollar will also do its work here as will a Saudi Arabia hell bent on market share. There will be less and less for shorts to hold onto and very few will want to be stuck on the same side of the trade as the big investment banks.
By Dan Doyle for Oilprice.com
Misperception #11: American shale producers are the new swing producers. No, their banks are.
The oil markets are showing some life, having rallied 11 percent over a two-day period. But if a bigger rebound is not around the corner, it won’t just be oil companies that will be feeling the pain: their lenders will also face some steep losses if drillers can’t come up with the cash to cover debt payments.
Drilling for oil is an expensive process. Until the oil begins to flow, companies have to shell out cash without seeing much in return. Without revenues from other wells already in production, oil companies have to take on debt to finance operations. Even for companies with big production portfolios, debt is a crucial source of funds to keep the treadmill of new drilling going. Between 2010 and 2014, the oil industry took on around $550 billion in debt, a period of time in which oil prices surged. Now with a crash, that volume that becomes especially hard to service.
The largest banks – JP Morgan, or Citibank, for example – are so massive that losses on loans to the energy industry will likely result in only "slight negatives," as JP Morgan’s Jamie Dimon put it a January conference call with investors. But smaller more regionally-focused banks, especially in Texas and North Dakota, are facing a much bigger problem.
During the last oil crash in the 1980’s, around 700 banks failed after oil prices crashed. Analysts aren’t expecting failures to come close to those numbers, but there are a series of banks that have high percentages of their loan portfolios coming from the energy sector. For example, companies like International Bancshares has (42.4 percent), and Cullen/Frost Bankers (35.9 percent), two Texas-based regional banks, are highly exposed, as CNN Money reported in January.
Canadian banks are also reeling from oil prices that have dropped by more than 50 percent since mid-2014. The S&P/TSX Commercial Banks index, an index of eight Canadian banks, dropped by around 10 percent in January, the index’s worst start to a year since 1990, according to Bloomberg.
Even British banks could be on the hook. The Royal Bank of Scotland, Barclays, and a series of other British banks are exposed to more than $50 billion in high-yield loans in the energy sector.
But not all lenders are in trouble. Eyeing wounded animals, some financial vultures sense an opportunity. Hedge funds and private equity are stepping into the fray, providing credit to distressed oil companies at exorbitant rates. Shut out of traditional debt markets, oil companies drowning in debt have few other options. Particularly for smaller drillers, these emergency loans provide a lifeline to pay off other debt.
Bloomberg reported on February 2 that several major private equity firms – Carlyle Group, Apollo Global Management, Blackstone Group, and KKR – are in the midst of taking massive positions in indebted oil companies.
KKR, for example, provided $700 million in credit to Preferred Sands LLC, a producer of sand used to frack oil and gas wells. In exchange for the emergency loan – which carried a 15 percent yield – KKR took a 40 percent ownership stake in the company. Blackstone did a similar deal with Linn Energy LLC, another struggling oil firm.
The New York Times chronicled the case of Resolute Energy, a company barely alive after being overwhelmed by debt. Highbridge Capital Management, a hedge fund, provided $150 million in loans to the company at a more than 10 percent interest rate.
The onerous terms on new debt obviously makes it even less likely that oil drillers will be able to get back on their feet. But these vulture investors know that they can seize assets in the event of a bankruptcy. And if oil prices do turnaround, then these financial institutions come away with potentially lucrative oil-producing assets that they obtained at fire sale prices.
"The single best opportunity to invest is distressed debt in energy," David Rubenstein, a co-founder of The Carlyle Group, said in Davos at the World Economic Forum.
By Nick Cunningham for Oilprice.com
The impact of the massive natural gas deal between Gazprom and the Chinese this week will be felt for years. It has absolutely shocked me how little press has been devoted to this $400 billion 30-year deal for Russian gas. One wave of Putin’s pen has entirely shifted the way we’ll now need to look at the European energy picture.
Interestingly, no final price has been settled on for this massive deal. This is, on the face, a very bad sign for Gazprom, implying that the Chinese are demanding exceedingly cheap gas contracts assumed to be more than $100 per thousand cubic meters LESS than Russia currently charges into Europe.
But Putin is willing to deliver such cheap supply to China for more than 30 years hence because it gives him so much more leverage into Eastern Europe and the EU and a particularly strong hand to play in Ukraine. With a new and ready customer to the East, Gazprom no longer needs the EU markets nearly as much as the EU needs Gazprom. It is now the Europeans who will have to scramble, and quickly, to find new natural gas sources before the bulk of the gas starts heading for China in 2018.
That sounds like a lot of time, but it’s not – and Putin will not wait 3 years to begin turning down the spigots in the winter into Ukraine and the EU if he’s unsatisfied with political outcomes. It is a tactic that Gazprom has used successfully twice; in 2006 and 2009, and US sanctions and tough talk has Putin ready to fight back in a way that is unstoppable. He’s going to freeze Europe – literally.
Now, looking through that window of possible events makes the walk away of Woodside Petroleum (WPL) from the Leviathan partnership they had in the Levant basin of the Mediterranean with Noble Energy (NBL) look exceedingly short-sighted. Noble clearly wanted to grab the low-hanging fruit of Leviathan first, by signing local piped gas deals with Egypt and Jordan – a move that would monetize their monster gas find in the quickest way. Woodside, clearly, was much more excited about a big LNG investment that would move gas into Europe – an idea that would cost billions more and take several more years to see profit on. And it is not clear that Israel isn’t about to get greedy on Leviathan and perhaps Woodside also feared a “Brazil-like” money grab on the Mediterranean leases by the Israelis.
But adding that all up doesn’t matter at all – with the new Russia/China pact, the gas under the Med has become much more valuable than it was even 24 hours ago, with many European suitors now drooling at the gas prospects Woodside thought Noble had abandoned. Yes, Woodside could have had it all – they’re big enough to handle the opportunity of Leviathan and Tamar – but now they’ve left. And Noble knows they’ll need a partner, someone perhaps even bigger than Woodside to grasp the biggest prize here – the LNG project that Woodside wanted. And it’s coming. And now it’ll come even faster.
My bet for that next partnership is on Total (TOT), the French giant who has a fabulous record of playing in tough Mideast political waters (Libya, e.g.) while getting the energy out and is a natural go-between to the Israelis and their prospective cut on sales, and the hunger of EU members for this new source of natural gas.
I’ll bet the phone will ring in Houston soon and Chuck Davidson will hear a French accent on the other end – and perhaps find a partner capable of seeing forward to the future and realizing the potential of Leviathan in light of a coming Euro gas shortage.
Bottom line is -- I really, really like Noble energy here.
Source : oilprice.com
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