Musings from the Oil Patch - an educative report
Comment of the Day

December 02 2013

Commentary by Eoin Treacy

Musings from the Oil Patch - an educative report

Thanks to a subscriber for this always educative report by Allen Brooks for PPHB dated November 26th. Here is a section: 

Wall Street is changing what it wants from producers active in the shale revolution. Until commodity prices, especially natural gas, move higher, the profitability of developing shale resources will be challenged. For some producers, depending upon the quality of their shale assets and the cost of their operations, there is still likely financial pain ahead. Service companies are struggling to ascertain the level of activity for the industry over the next few years and the types of equipment and services that will be in demand. This will help them decide where to invest. Service companies are also considering where to place their capital bets - North American shale plays, offshore or select international land and shale plays. Additionally, the service companies need to better understand which of their product and service business lines will be of long-term value and which ones they should dispose of. These considerations suggest the service industry is on the cusp of a restructuring. The recent announcement by Weatherford International (WFT-NYSE) that it plans to shed four business lines is a manifestation of that trend. We have also had National Oilwell Varco (NOV-NYSE) decide to split off its oilfield distribution business into a new company. Other corporate moves have involved offshore drilling companies announcing plans to establish MLPs and/or separate companies to hold segments of their current rig fleets. Some of these restructuring moves are designed to help boost capital returns to investors, especially those seeking yield. On the other hand, restructuring of the industry may be due to too many companies chasing the same business and the fact that many of these companies are owned by private equity firms needing to cash in on their investments.

Eoin Treacy's view

Here is a link to the associated report. 

To say that the surge in US unconventional oil and gas supply has been disruptive is an understatement. A measure of just how much of a change this has caused can be seen in how complicated it has been to identify clear winners within the energy complex. A number of large companies paid too much for drilling rights and have been forced to accept write downs, others are now attempting to claw back costs by squeezing service companies. Concurrently rail is competing with pipelines to attract investment capital. Some of the greatest beneficiaries have been consumers such as utilities, chemical and industrial companies rather than the producers of natural gas.

Those who have benefitted most from low natural gas prices have a vested interest in maintaining the situation. However what has become clear over the last 18 months is that as the supply situation normalises producers will need a higher price to justify expenditure on increasing production. $4 has often been cited as a breakeven for a considerable proportion of the industry and prices have returned to test that level over the last month. Meanwhile $3 has offered a floor for more than a year. While the interests of suppliers and consumers remain finely balanced with both represented by substantial lobbying groups, the balance of probability remains skewed towards higher to lateral ranging.

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