Oil prices down 25 per cent

Peak Oil over ? Ho hum!

People in the Peak Oil movement like Rice Farmer and Mike Ruppert have been talking for some time now.

Oil just slipped below $80 — and it’s expected to fall further

Oil’s crash threatens to derail booming Alberta

Bloomberg,

23 October, 2014

Oil prices were plummeting again on Monday, slipping below US$80 dollars per barrel as worries mount about too much oil finding too few buyers over the next several months or longer.

Monday’s sell-off was triggered by fresh estimates from a big Wall Street bank suggesting oil prices will continue their free fall into winter, landing eventually in the mid-$70 range through the first half of next year.

Wall Street heavyweight Goldman Sachs cut its price estimate on WTI, or Western Texas Intermediate oil, to $75/barrel from $90 through mid-2015 on Monday while making a similarly downbeat revision to its expectations for Brent crude.

A drop of that magnitude will have a direct impact on Canadian energy producers who are deciding now whether to trim production output, experts say. The new forecast sent a fresh scare through investors Monday with shares dropping in Canadian energy companies such as Suncor.

Goldman believes overproduction of shale gas in North America alongside other factors has created a global supply glut that won’t be worked off for some time – especially as several larger economies exhibit signs of slowing down, such as Germany and China.

Good for consumers?

Oil has tumbled 25 per cent since it summer highs in June. The steep decline is benefiting consumers in the short-term, in no small way because of falling prices at the gas pump.

Current gas prices are expected to put hundreds of additional dollars in consumers’ pockets, according to experts.

Analysts at investment firm Raymond James said late last week cheaper oil translates to about $600 in the pocket of a “typical suburbanite” household in North America.

But depressed prices will hurt in the long run – especially in Canada, the lone net exporter of oil among G7 countries, analysts said.

“Falling oil prices will help consumers but represent a net downside risk for Canada’s economy,” Moody’s Analytics economist Alexander Lowy added in a note to clients.

Alberta and Saskatchewan are “booming because of oil extraction” but Canadian energy companies have higher costs compared to oil producers elsewhere, Lowy said.

“Prolonged weakness in oil prices will materially decrease new investment in oil exploration, potentially undercutting western Canada’s strong growth. Should that region’s engine falter, the impact will be felt well beyond Alberta,” Lowy said.

Indeed, the Bank of Canada highlighted the risk in its latest economic update last week, noting that “while lower oil prices would benefit consumers, their effect on Canada would, on balance, be negative.”

Shale Boom’s Allure to Wall Street Tested by Bear Market

The benchmark U.S. oil price has fallen 25 percent from its June peak

Bloomberg,

23 October, 2014

Falling oil prices are testing investors’ commitment to the Wall Street-funded shale boom.

Energy stocks led the plunge earlier this month in U.S. equities and the cost of borrowing rose. The Energy Select Sector Index is down 14 percent since the end of August, compared with 3.8 percent for the Standard & Poor’s 500 Index. The yield for 190 bonds issued by U.S. shale companies increased by an average of 1.16 percentage points.

Investors’ sentiment toward the oil and gas industry has “certainly changed in the last 30 days,” said Ron Ormand, managing director of investment banking for New York-based MLV & Co. with more than 30 years of experience in energy. “I don’t think the boom is over but I do think we’re in a period now where people are going to start evaluating their budgets.”

What distinguishes this U.S. energy boom from the way the industry operated in the past is the involvement of outside investors. In 1994, drillers funded 42 percent of their own capital spending, according to an Independent Petroleum Association of America member survey. Today, shale companies are outspending their cash flow by 50 percent thanks to borrowed money, according to the IPAA. They’re selling more than twice as much equity to the public as they did 10 years ago, according to Tudor Pickering Holt & Co., a Houston-based investment bank.

Pump jacks and wells are seen in an oil field on the Monterey Shale formation where gas...Read More

“After the tech bubble and then the real estate bubble, Wall Street had to put its money somewhere, and it looks like they put a lot of it into domestic onshore oil and gas production,” said Michael Webber, the deputy director of the Energy Institute at theUniversity of Texas at Austin, who advises private investors.

Market Peak

West Texas Intermediate, the benchmark U.S. oil price, has fallen 25 percent since its recent peak on June 20.

Between the S&P 500’s record high on Sept. 18 and its five-month low on Oct. 15, energy companies led the index down 14 percent, more than any other industry, data compiled by Bloomberg show. When the market rebounded on Oct. 16, energy again took the lead, gaining 1.7 percent.

The drop wiped $158.6 billion off the market value of 75 shale producers since the end of August, according to data compiled by Bloomberg.

Investors are demanding 170 basis points, or 1.7 percentage points, in additional yield to own top-rated energy-company bonds compared with U.S. government debt, up from 148 basis points a month ago, according to a Bank of America Corp. index. For junk bonds, of which energy companies are a fast-growing component, the additional yield is 507 basis points, up from 407 and close to the highest since 2012, Bank of America data show.

High Yield

Issuance of high-yield energy bonds grew 148 percent since 2009 to $211 billion, according to Fitch Ratings. They account for 16 percent of the market, Fitch said.

The yield on the $350 million bond due in 2018 issued by Whiting Petroleum Corp. (WLL), the Denver-based company that’s pursuing a transaction to become the largest producer in North Dakota’s Bakken shale, jumped to as much as 6.1 percent on Sept. 30, the highest in almost three years, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield returned to 5.566 percent on Oct. 22, 67 basis points higher than a year earlier.

Whiting has low debt compared with earnings and enough cash on hand, said Eric Hagen, vice president of investor relations.

“Is the pullback warranted or is it an overreaction, especially for companies that do have strong debt metrics?” Hagen said.

Credit Line

Whiting’s ratio of total debt to earnings before interest, taxes, depreciation and amortization was 1.56 in the second quarter of 2014, compared with 3.28 for the shale industry, according to data compiled by Bloomberg.

Photographer: Eddie Seal/Bloomberg

An oil drilling rig near Encinal in Webb County, Texas. West Texas Intermediate, the... Read More

Yields on SandRidge Energy Inc.’s $450 million bond due in 2020 climbed to a record 10.253 percent on Oct. 16, Trace data show. The Oklahoma City-based company’s capital expenditures were $3.6 billion in the past year, almost five times more than its cash from operations of $714.7 million, company data compiled by Bloomberg show.

SandRidge has an unused $775 million credit line and no bonds due until 2020, said Jeff Wilson, a company spokesman. It also hedged 90 percent of liquids production in 2014 and a majority in 2015, he said.

“We feel we’re in pretty good shape,” Wilson said.

Magnum Hunter Resources Corp. (MHR), a Houston-based driller, took out a $340 million loan to refinance debt this month, paying 750 basis points above the London interbank offered rate, or Libor, compared with the 500 basis points the company originally sought. It had 6 percent of the $272.5 million still available on its credit line, data compiled by Bloomberg show.

Credit Boom

The loan gives the company liquidity until it can increase production and sell assets, Chief Executive Officer Gary Evans said by phone. Magnum Hunter is paying more so it has a fixed amount of credit that won’t change with lower commodity prices, he said.

“It was a credit boom just as much as it was a shale boom,” Eric Cinnamond, who manages the $691 million Aston/River Road Independent Value Fund, including $20 million in the shares of three shale producers, said by phone from Louisville, Kentucky.

The downturn could be a buying opportunity for less indebted companies, Cinnamond said. The Energy Select Sector Index gained 5.5 percent since Oct. 14 as the benchmark price for U.S. crude closed at $80.52 a barrel on Oct. 22. About 96 percent of U.S. shale oil production remains profitable at $80 a barrel, according to the International Energy Agency. Sanford C. Bernstein LLC analysts estimate it’s more like two-thirds, according to an Oct. 20 report.

Horizontal Drilling

The shale boom was made possible by innovations in horizontal drilling, which bores through rock, sometimes for miles. Operators use hydraulic fracturing, or fracking, to shatter the rock with blasts of water, chemicals and sand to free hydrocarbons.

Early on in the boom, the companies that pioneered shale drilling, known as independents, formed partnerships with international oil companies, Aubrey McClendon, the former CEO of Oklahoma City-based Chesapeake Energy Corp. who was an early proponent of fracking, said in a presentation to investors in Dallas last month. Some deals soured, in part because natural gas prices collapsed in 2011.

As the international companies pulled back, buyout firms stepped in, McClendon said. Private-equity deals in oil and gas more than doubled since 2002, and were valued at more than $30 billion in 2012, according to PricewaterhouseCoopers LLC.

Easier Economics

The shale boom has also been a boon to investment banks, which have made $5.2 billion in adviser fees from U.S. oil and gas companies’ share sales since 2009, second only to the haul from the financial industry itself, according to data compiled by Bloomberg. Oil and gas also accounted for $676.8 billion in completed U.S. mergers and acquisitions, trailing only non-cyclical consumer businesses such as food and drugs, the data show.

Wall Street warmed to shale drilling because the economics are easier for investment managers and analysts to model, according to Ralph Eads, Houston-based vice chairman of Jefferies LLC and McClendon’s fraternity brother at Duke University. Whereas traditional drillers searched for underground pools of oil and gas, the locations of fuel-soaked shale are well known, Eads said. The trick is being able to get to them cost-effectively, he said.

“External money has flowed to shale plays like it never flowed to conventional exploration,” said Michelle Foss, an energy economist at the University of Texas at Austin.

Last year, domestic onshore producers spent $38 billion more than the $19 billion of cash flowthey generated, compared with $1 billion versus $18 billion a decade earlier, according to data from Tudor Pickering Holt, which specializes in energy.

The borrowing and deficits are “extraordinarily different” than in the past, according to Bobby Tudor, the company’s chairman and CEO.

“Everyone loved the shale boom,” said Cinnamond of Aston/River Road. “People got carried away.”

RT's view

Oil prices won’t recover above $100 – Russian Finance Ministry