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2016

Oil's Magic Number Becomes $50 a Barrel for Promise of Recovery

 

(Bloomberg) -- The new magic number in the oil industry is $50.

BP Plc, rig-owner Nabors Industries Ltd. and explorer Pioneer Natural Resources Co. all said in the past 24 hours that prices above $50 will encourage more drilling or provide the needed boost to cash flow. With oil bouncing close to $45 a barrel, an industry that has been shaving costs to stay competitive is ready for signs of stability at a price level less than half of 2014’s average.

At an average price of $53 per barrel of oil means the world’s 50 biggest publicly traded companies in the industry can stop bleeding cash, according to oilfield consultant Wood Mackenzie Ltd. Nabors, which owns the world’s largest fleet of onshore drilling rigs, said it has already been talking with several large customers about plans to boost work in the second half of the year if prices rise "comfortably" above $50.

"It’s not just about touching $50," Fraser McKay, vice president of corporate analysis at Wood Mackenzie in Houston, said Tuesday in a phone interview. "It’s about touching, maintaining and having the perception of future prices above $50 a barrel before you start sanctioning projects that are economic at $50 a barrel."

Spending Cuts

The global oil industry slashed more than $100 billion in spending last year and is in the midst of further cuts this year to survive what Schlumberger Ltd. has called the industry’s worst-ever financial crisis. In North America alone, spending is expected to drop by half from last year.

Prices have rebounded by about two-thirds from a 12-year low, with Brent, the international crude benchmark, trading above $45 a barrel Tuesday. The rally has explorers from BP to Pioneer looking ahead to an eventual recovery as they release first quarter earnings this week. Next year, BP will be able to balance cash flow with shareholder payouts and capital spending at an oil price of $50 to $55 a barrel, down from a previous estimate of $60, the London-based explorer said. Pioneer expects to add as many as 10 horizontal drilling rigs when oil reaches $50 and the outlook for supply and demand of crude is positive, the company said Monday in its earnings statement.

For every $5 that oil prices climb, above a baseline of $37, Continental Resources Inc. adds another roughly $200 million in revenue, Chief Operating Officer Jack Stark said last month in an interview in New Orleans. By the time oil prices reach $52, the Oklahoma City-based explorer would probably look at adding more rigs, he said.

"We won’t chase price spikes," Stark said. "We’re committed to being patient."

Failed Rally

Yet even talk of ramping up again is bringing a stinging reminder of last year’s failed attempt to restart activity too quickly after oil prices rose.

"We got out ahead of ourselves -- bit of a head fake there," Tony Petrello, chief executive at Nabors, told analysts and investors Tuesday on a conference call. "We’re going to be a little more guarded here."

Exactly when oil prices hit that level and how long they need to stay there is a question no one can say for sure. Nabors said the activity could start up in the middle of the third quarter or into the final three months of this year. Continental estimated that supply and demand could be nearing balance later this year and be "absolutely in balance" or in need of more oil next year.

"The absolute timing may be off a bit," Stark said, "but ultimately it’s going to happen."

 

 

SOURCE - Bloomberg

Oil Majors' $100 Hangover Hurts Profit as Cost Cuts Fall Short"The world’s biggest oil companies, set to report their worst quarterly earnings in more than a decade, are finding their cost-cutting efforts haven’t matched the decline in crude prices over the past two years.

While producers have been deferring projects, eliminating jobs and freezing salaries, the process will take three years to complete, according to Barclays Plc’s Lydia Rainforth. In the meantime, profits are being hammered.

“A lot of work still needs to be done on costs,” Rainforth, a London-based oil sector analyst, said by phone. “It’s a reflection of how much costs had piled up and how long a process this is.”

For producers from  Royal Dutch Shell Plc to Chevron Corp., reeling under the threat of credit-rating downgrades, slashing costs is the surest way of protecting balance sheets. Still, reversing course is proving painful after $100 oil persuaded companies to pump money into expensive areas in search of new deposits, hire more people and rent rigs and services at record rates. Productivity suffered.

Shell, Europe’s biggest oil company, had operating costs of $14.70 a barrel last year when Brent crude averaged $53.60, Barclays said in a report last month. That’s more than double the $6-a-barrel cost in 2005, the last time oil averaged in the $50s, according to the report. BP Plc’s operating expense was $10.40 last year compared with $3.60 in 2005, according to Barclays. The operating costs don’t include capital spending, taxes and royalties paid by producers.

Earnings Outlook

After rising every year from 2010 to 2014, Shell’s costs fell 15 percent last year, according to Barclays. BP’s dropped 19 percent.

That’s not been enough to counter the rout in oil prices.

BP is expected to post an adjusted loss for the first time since the Gulf of Mexico oil spill in 2010, when it reports first-quarter results on April 26, according to analyst estimates compiled by Bloomberg. Shell, reporting on May 4, is likely to post its weakest adjusted profit in more than a decade.

Exxon Mobil Corp., the world’s biggest oil company, will report the lowest quarterly profit in more than two decades on April 29, according to analysts estimates. Chevron is estimated to report a second consecutive loss the same day. Total SA’s first-quarter adjusted net income is predicted to be the lowest since 2001.

The extent of the work facing oil-major CEOs can be seen at BP. While the British producer’s boss Bob Dudley was one of the first to prepare for the downturn, it still took BP most of 2014 and 2015 to identify where costs could be cut, with full implementation only coming this year, Rainforth said.

The London-based company said in February it had reduced annual cash costs by $3.4 billion compared with 2014 and expected them to be about $7 billion lower in 2017. A BP spokesman declined to comment further.

Shell plans to reduce operating expenditure by $3 billion in 2016 after cutting it by $4 billion last year. The company declined to comment beyond reiterating that it has options to further reduce spending should conditions warrant it. Exxon and Chevron declined to comment.

Total is targeting spending on operating its exploration and production business of $6.50 a barrel of oil equivalent this year, after cutting that to $7.40 last year from $9.90 in 2014, according to a company presentation in February.

 

Total Dividend

Total Chief Executive Officer Patrick Pouyanne told reporters in Paris Thursday that action taken to reduce costs would allow the company to fully fund its dividend from cash flow at an oil price of $60 a barrel.

Companies are doing whatever it takes. Total is reducing the speed of its service boats in Angola to save gasoline, renegotiating maintenance contracts in Congo, using fewer transportation vessels in Brunei and has stopped using a storage tank in Indonesia to save the French company about $5 million, Chief Financial Officer Patrick de la Chevardiere told analysts in July last year.

“The companies need to do more of the same over an extended period,” said Iain Armstrong, a London-based analyst at Brewin Dolphin Ltd., which owns Shell and BP shares. “Companies are sharing helicopters and tug boats in the North Sea. It shows how far down the track they had gone in over-spending and over-engineering projects.”

Brent crude averaged $35.21 a barrel in the first quarter, the lowest in almost 12 years. It traded at $44.80 on the ICE Futures Europe exchange in London at 1:34 p.m. Friday.

The impact of weaker prices is being compounded by lower profits from refining, a business that has been bailing out oil majors over the past couple of years. Global refining margins dropped to $10.50 a barrel in the first quarter, 31 percent lower than a year earlier and 20 percent lower than the preceding quarter, according to BP’s data.

Oil prices rose for 10 of the 11 years until 2012 and averaged above $80 a barrel every year from 2010 to 2014. In those years, the companies were flush with cash and they expanded, even as productivity languished. Shell, BP and Total’s oil and natural gas output per employee in its upstream division dropped in many of those years as costs blew up, according to a Morgan Stanley report this month.

“Oil companies haven’t usually been good at controlling costs and allowed them to bloat out in the years of high oil prices,” said Philipp Chladek, a London-based analyst with Bloomberg Intelligence. “It feels like many oil companies haven’t really bought in to the lower for longer, at least by actions. Most people still seem to believe that oil will rebound to $60 or above before long.”

 

SOURCE: BLOOMBERG

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Late last year, Brandon MacKay listed his Kawasaki dirt bike for sale on Kijiji, the online classifieds site. It was the only treat the 25-year-old had given himself in three years living in Fort McMurray. The rest he’d spent on supporting and visiting his wife and kids in Pictou County, N.S. But in crafting the ad for the bike—$4,400 or best offer—MacKay did what any sales agent would advise against: he revealed his desperation to sell. “I lost my job and am in need of money for my wife and kids for Christmas.”

MacKay had followed a well-worn path to prosperity for East Coasters: with limited job prospects at home, the engineering technologist flew to Alberta’s oil sands capital and found a job in mechanical sales. It was good money. He bought a 30-acre plot and 2,000-sq.-foot house for his family back east. One day, while he was setting up for a client visit, his branch manager summoned MacKay for what he thought would be a meeting about sales projections for 2016. “Before I could even sit down,” MacKay recalls, “he told me it was my last day.”

Now MacKay is faced with a reality that would have been inconceivable a year ago: he might have to leave Alberta to find a job.

MacKay’s ordeal is just one example of the upheaval many Albertans, new and old, have suffered since oil prices began their long, hard crash. It’s affected everyone from steel-toed rig hands to French-cuffed executives, with layoffs hitting Calgary and Fort Mac, not to mention the many small towns across Alberta that rely heavily on the energy sector.

As this downturn has unfolded, the great oil rout of 2014-15 seemed, at least at first, to be following a similar pattern to other busts. Some big oil sands projects get delayed, rig and well activity shrivels and Employment Insurance rolls spike, leading to knock-on effects: Calgary towers thin out, the real estate market softens, and cuts spread to everything from shops to restaurants. Yet past plunges were reliably followed by a bungee-like snap back in growth, as oil prices regained their upward momentum. It’s a pattern a generation of Albertans has come to expect, after the 1998 Asian financial crisis, the 9/11 terrorism shock and the 2008 financial crisis.

But the broad optimism of early 2015 has gradually given way to dread. This feels more like the awful 1980s, with no swift recovery to come—not in a world glutted by oil, as Saudi Arabia battles to squeeze out higher-cost producers like Russia and the United States. Before Christmas 2014, as prices thudded from above US$100 per barrel to below US$60 for the first time since the Great Recession, oilpatch observers wondered how soon US$80 oil would return. Instead, the OPEC cartel’s decision to keep pumping, and the surprising resilience of U.S. producers, have pushed oil down to below US$40.

Energy companies are preparing for a grim 2016. Analysts predict budgets will get slashed further, and that more energy firms may have to cut staff, having already laid off thousands. Ongoing oil sands construction projects will continue to wind down with little to replace them, hitting both the residential and commercial real estate sectors hard. For instance, in nearly one-sixth of all the office space in downtown Calgary, the fluorescent lights now shine on empty cubicles, and it’s forecast to get worse. Reports of the symptoms pop up almost daily: more insolvencies, more business for moving trucks and repo crews, even a noticeable uptick in suicides. The Calgary Stampede itself has been forced to lay off staff, as its offseason event bookings dried up. In November, the Alberta unemployment rate came within one-tenth of a percentage point of the national average, the closest it’s been since 1989. Those trend lines are expected to cross over next year, making it more clear to Canadian job-seekers that the Alberta dream is in decline.

Brandon MacKay works on this motorbike in his trailer turned into a make shift garage, in Fort McMurray Alberta, November 14, 2015. Brandon MacKay was recently laid off from his job. (Photograph by Jason Franson)

Brandon MacKay works on this motorbike in his trailer turned into a make shift garage, in Fort McMurray Alberta, November 14, 2015. Brandon MacKay was recently laid off from his job. (Photograph by Jason Franson)

The rest of the country isn’t immune from those ominous grinding sounds coming from Canada’s longtime economic engine. Canadian GDP dipped into recession territory in the first half of 2015 on the oil shock, and though the country managed a rebound in the third quarter, Alberta’s troubles—as well as slumps in other oil-rich provinces like Saskatchewan and Newfoundland—have left a gaping wound. The energy sector had long driven Canada’s trade surplus, papering over weakness elsewhere while soaking up large numbers of unemployed and underemployed people from regions like the Maritimes and hard-hit southwestern Ontario. Many economists predict a gradual rebound, but nothing head and shoulders above national growth rates, as had been typical for Alberta. “Average growth” is an unfamiliar term in Alberta, and will take some getting used to.

But even average growth seems a ways off, as troubles keep filtering through the province. In Alberta’s southeast, Medicine Hat drew international acclaim in the spring of 2015 after it became the first city in Canada to eliminate homelessness, having pursued an ambitious five-year agenda to put people into subsidized housing within 10 days of them landing in emergency shelters. After so much progress, Medicine Hat’s Salvation Army shelter is back to averaging 17 clients a night, up about one-third since 2014—too many to promptly find them all affordable housing. Local demand for donated clothing and household items also rose by more than a quarter over the last year, says manager Murray Jaster. But donations slumped too, and he had to reduce staff. When he’s out along the Trans-Canada Highway that dissects Medicine Hat, Jaster has noticed more hitchhikers than he’s seen in years—people looking to take the long road home, or perhaps to wherever in Canada the jobs may be. “Man, we’re a have-not province all of a sudden,” Jaster says. “Who can believe it? I can’t.”

To be sure, the oil crash isn’t yet deep or dark enough to have actually lowered Alberta to the status of federal welfare case, qualifying for equalization payments. It still remains a wealthy province, with the highest average weekly income in Canada. “It’s still not that bad relative to the rest of the country,” says University of Calgary economist Trevor Tombe. “I think we were just used to things being so good that we lost a little bit of perspective.”

But, to Jaster’s point, there is much his province used to have that now seems gone. Most noticeable is Alberta’s eroding status as the Promised Land for so many Canadians from other parts of the country. Over the last decade, net interprovincial migration by 18- to 44-year-olds, the key working demographic, swelled Alberta’s population by 200,000, according to a report by a rather envious Business Council of British Columbia. (That province netted fewer than 40,000 over that stretch, while all other provinces were net losers.) The momentum has shifted. While 1,200 more Canadians still moved to the province than left it during the third quarter of 2015, that was the smallest gain since 2010—when the province was recovering from the 2009 oil price collapse—and less than half the average of the last 50 years.

READ MORE OF THE STORY HERE. (Macleans)

 

TransCanada now believes the Keystone pipeline has leaked about 16,800 gallons in South Dakota, a dramatic increase from initial estimates.

The leak was discovered on Saturday and forced a key section of the controversial pipeline to be shut down. TransCanada (TRP) initially told regulators the spill totaled about 187 gallons of oil.

TransCanada told CNNMoney that while the company has "made progress" in trying to find the source of the leak, it has "yet to pinpoint the source."

Despite that, TransCanada said the spill has been "controlled" because the pipeline was shut down immediately after it was reported and valves and pump stations were shut down remotely. The company said visual inspections confirmed the valves were closed.

"There is no significant environmental impact observed," TransCanada said.

Related: U.S. oil boom not slowing enough to solve epic glut

TransCanada said a crew of about 100 people continue to work "around the clock" with regulators at the site, which is about four miles from its Freeman pump station in Hutchinson County, South Dakota.

The company now tells regulators the spill totals roughly 400 barrels, which is equal to about 16,800 gallons. The new oil spill estimate was based on the safe excavation of soil to expose more than 100 feet of pipe, the company said. The estimate includes the amount of oil observed in the soil and the "potential area impacted."

TransCanada said it has "taken this incident very seriously" and continues to work with federal and state regulatory agencies.

Still, environmentalists criticized TransCanada over the oil spill.

The "disaster is a stark reminder that it's not a question if a pipeline will malfunction, but rather a question of when," Michael Brune, executive director of the Sierra Club, wrote in a statement. "

Environmental concerns led President Obama to deny a permit to expand the Keystone pipeline last year. TransCanada has challenged that denial in U.S. federal court.

SOURCE: CNN MONEY

On Wednesday U.S. Crude Futures rallied $1.86, or 5.2%, to reach $37.75 a barrel on the New York Mercantile Exchange with the unexpected news that U.S. crude stockpiles are down.  Even though many analysts projected inventory to continue it’s upward trend, U.S. crude-oil supplies fell by 4.9 million barrels in the week ending April 1st.  The EIA reported the drop is attributed to declined imports and more importantly the increase in refinery activity; reporting that refineries ran at 91.4% capacity last week compared to 90.4% the week before. The general consensus is that refineries are increasing output to meet the summer demand when drivers are expected to travel more – especially with the price of gasoline as low as it is currently. 

 

It’s important to note that one week doesn’t constitute a trend, but this is a good sign that prices are primed for a rebound.  Market watchers will be keeping a close eye on many contributing factors over the next couple weeks to form their opinion on the future of oil prices.  The main topic they’ll be tracking is the fact that oil inventories around the world are still near record highs.  Iran is still defying fellow producing countries by refusing to decrease output and because of this stance, Saudi Arabia recently changed it’s tune as well saying they won’t cut back production unless Iran is on board as well.

 

So even though we’ve seen a decline in U.S. inventories this week, analysts and investors say that stockpiles have to start declining steadily on a global level before prices can rise further.