Crude Observations

It’s Madness I Tell Ya!

If last week was a Twitter storm, then this week must obviously address the likes, retweets and replies (both positive and negative). And yes, I do receive replies and comments on occasion.


Interestingly enough, it was a fairly narrow group of tweets that garnered a fair bit of attention, starting with these two:


“Finally. FAKE NEWS Media won’t report on how much Dumb money is going back into the same companies that were BANKRUPT 6 months ago.

Will these banks never learn? FREE CASH FLOW matters! Stop feeding the fire!!!! Where’s the discipline?”


How long can the production party last? 5-10 years according to EIA. 4ever according to Wall Street – please sign the cheque here. #suckerbet


Comments on this ranged from “attaboys” for pointing out the danger of hype to comments about efficiency, capital discipline and low break-evens.


I suppose as someone who makes their living in the financial world I can see how the tweets seems contradictory. After all, as a capital market participant in one of the most adversely affected markets during the downturn, shouldn’t I be happy to see all this money pour into the market with the resultant increase in asset values, activity levels and thus value for my clients?


On the surface, sure. I have absolutely nothing against capital going to work. What I do have an issue with is capital going to work that appears to have no real risk premium attached to it. Not to mention the hype and hysteria attached to what could be a re-inflation of the oil asset/production bubble and the problems that can cause down the road.


In many ways, to me at least, it’s like the overall stock market since the election. There is no rhyme or reason to its current lofty heights. It sure isn’t fundamentals. Lots of analysts say it’s driven by optimism about the new administration. But there is no tax plan, there is discussion about massive unfunded spending plans, trade wars, border walls, health care chaos and nefarious Russian connections to anyone who has ever bought a Trump steak. Against this backdrop, the market is up 16.7% since the election. And no one is selling. I know I’m not. I can’t. The ride is too good, even if it goes against my best instincts.


At any rate, back to my point.


Since late 2014, the energy sector as a whole has been gone through an extended existential crisis driven by cheap debt funded over-exploration and production that caused oil prices to collapse and no less than 200 companies file for bankruptcy (arguably not enough, but that’s a story for another time). Just this week SeaDrill announced it may have to file for Chapter 11 if it can’t restructure its $7 billion in debt including $2.5 billion coming due in June.


Billions of dollars of loans have been written off (think $85 billion), the cost to borrow has skyrocketed for unsecured and second lien loans, oil and gas junk bonds took that market into a comparative emerging market yield-wise.


On an international basis, oil producing countries such as Venezuela (who by the way is almost officially out of cash) teetered on the verge of default and are likely to achieve that elusive goal in the near future.


This is nothing new to anyone. Old news, right?


But now, the price of oil has come back. It wasn’t immediate – the re-inflation was gradual and well-followed (!), but prices have doubled since last year at this time. And it appears that no one cares anymore.


Since September, the rig count is on a tear. Now, further emboldened by post-election fantasies of Donald Trump taking the shackles off the energy sector, companies are engaging in an asset accumulation frenzy, particularly in the Permian.


Now I realize that this is really only one play, but what’s happened in the last few quarters is  emblematic of the lunacy that created the energy sector crash in the first place. I read an article the other day that Pioneer Resources posits that there are 160 billion BOE in the Permian. Seriously? What are the metrics on this? At what price?  In the same article, Rystad Energy is quoted as saying that the US has 264 billion barrels of oil, which of course includes existing fields and everyone’s favourite, “as yet to be discovered” deposits. Ah, now I get it.


Yes, the hype machine is in full force. And it is drawing money, lots of it.


But where is all the money coming from to put rigs back to work and make over-priced acquisitions? I’ll tell you one place it isn’t coming from – cash flow.


That’s right, all those companies that weren’t making any actual money all through the boom years of 2012 through 2014 and the subsequent crash years of 2015 and 2016? They still aren’t making money.


They borrow to fund operations and they borrow to fund capex. And when they can’t borrow to fund capex, they tap the equity markets where Wall Street and private equity appear only too happy to continue to recap their balance sheets and fund the merry go-round because in a rising overall market there is too much cash cash looking for a home. Equity financings are through the roof.


From where I sit, in my cozy perch in undervalued, underappreciated Canada, it’s hard not to think that people are acting like oil has already reached $100 a barrel, inventory no longer matters and OPEC has everyone’s back. Or maybe everyone is rushing to spend as much as possible now because they foresee imminent rate hikes, but if the variability in the price of the commodity they are drilling for doesn’t seem to faze them, I am hard-pressed to see how the cost of capital will slow them down when cash  gets dumped in the parking lot by a backhoe.


Look, I’m not saying that the Permian isn’t a world-class basin and I’m not suggesting that all producers are money pits. There are excellent prospects and opportunities to make a decent return everywhere.


But this headlong rush back into the market isn’t going to do anyone any favours when inventories haven’t yet budged and you are creating all the conditions for spiking US production. The wheels can come off OPEC compliance any day and you have OPEC leaders suddenly saying that $60 is their price target – in other words, slow down shale dudes, you are going to wreck it for everyone, again, by recreating the conditions that led to the downturn in the first place.


As it regards the debt markets, it appears that lenders in the US have put the blinders on in the rush to get capital out. Consider the following:


In August of 2016, Moody’s issued a report on the looming $110 billion debt wall for oilfield services and producer companies, with some $6 billion in debt maturing in the 2017, $21 billion in 2018 and a further  $29 billion by 2021. All this debt needs to be refinanced. It’s a massive amount and most of it was rated B1 or lower, 70% lower than C – the junkiest of the junky junk. No amount of equity recaps or kicking the can down the road can fix that.


For fun (and to find all these nifty stats), I did a quick google search on “oil debt” that did not yield a single hit that was published after that Moody’s report until I got several pages in. The highlight of a similar search on “oil debt 2017” was an article about Exxon.


So, a mere 6 months ago, this was an existential crisis for the entire industry and now it’s apparently vanished into thin air like unregulated fugitive methane emissions (like how I did that?). What happened? There is no way prices have rallied anywhere near enough for either the fear or the actual problem to go away. Or have we just moved on? Two years of crisis being just too tiring and Trump way too entertaining to bother, unless it shows up in a tweet.


Final points in this largely directionless post:


Most of the companies that survived through the downturn were, on average, less leveraged than their peers. They are marked by disciplined management teams with a plan, great land bases and low cost production that eschew the hype game and don’t chase the market, they lead it. On the backside of the downturn they are able to access new capital and pursue their plans in a new cost environment.


On the flip side, there are companies that were levered to the hilt, highly speculative, losing free cash flow at an astonishing rate (i.e. destroying value) and hit the wall, declared bankruptcy forcing their lenders to take a hair-cut and wiping out their shareholders. These so-called zombies having now  emerged from bankruptcy have immediately gone back to the equity and debt markets and restarted doing what they were doing before.


Ironically, each of these groups of companies appears to be treated the same in the current capital market frenzy. It’s like taking a substance abuser to rehab, then 2 weeks later dropping them off next to a crack den with your ATM card and expecting them to buy groceries.


It’s madness.


Cheap capital, over-valued markets, unfocused short term memories and whole pile of hype. It’s worth a note of caution, don’t you think?


That’s really what I was talking about in those tweets.


Prices as at March 3, 2017 (February 24, 2017)

  • The price of oil was choppy during the week ending down as increased drilling activity, storage and OPEC compliance battled for market influence.
    • Storage posted a modest increase
    • Production was up marginally
    • The rig count in the US continues to grow, although at a slower pace
  • Natural gas was weak during the week as milder weather crushed sentiment and kept prices down. Price was up for the week on sense the play was oversold
    • WTI Crude: $53.22 ($54.04)
    • Nymex Gas: $2.826 ($2.627)
    • US/Canadian Dollar: $0.7476 ($ 0.7631)



  • As at February 24, 2017, US crude oil supplies were at 520.2 million barrels, a increase of 1.5 million barrels from the previous week and 33.5 million barrels ahead of last year.
    • The number of days oil supply in storage was 33.4, ahead of last year’s 32.9.
    • Production was up for the week by 31,000 barrels a day at 9.032 million barrels per day. Production last year at the same time was 9.077 million barrels per day. The change in production this week came from a small increase in Alaska deliveries and increased Lower 48 production. Production growth will lead to this year’s production exceeding last year within a matter of weeks.
    • Imports rose from 7.286 million barrels a day to 7.589, compared to 8.292 million barrels per day last year.
    • Refinery inputs were up during the week at 15.664 million barrels a day
  • As at February 24, 2017, US natural gas in storage was 2.363 billion cubic feet (Bcf), which is 14% above the 5-year average and about 7% less than last year’s level, following a surprise implied net injection of 7 Bcf during the report week.
    • Overall U.S. natural gas consumption was up by 9% during the week on modest demand increases across all sectors
    • Production for the week was flat and imports from Canada fell by 15% from the week before
    • Warmer weather led to the first net injection in February and only the 4th net injection during the winter heating season in the 23 year history of the EIA estimates.
  • As of February 28, the Canadian rig count was 284 (44% utilization), 190 Alberta (43%), 34 BC (48%), 53 Saskatchewan (47%), 7 Manitoba (46%)). Utilization for the same period last year was about 26%.
  • US Onshore Oil rig count at March 3 was at 609, up 7 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 5 at 146.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
    • Offshore rig count at January 1, 2015 was 55Offshore rig count was up 1 at 18
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%



  • Oh Canada – CNRL blew the doors off with its results for Q4 2016 with net earnings of $566 million compared to a loss of $326 million in the prior period
  • Peyto, which by now you know is one of my favourites, reported on its 17th straight year of positive earnings with net income of $112 million compared to $138 million in the fiscal 2015. Tick tock, tick tock, profit.
  • Canada’s GDP grew by 2.6% last quarter thanks to the energy exports
  • The BC government approved the expansion of the TransCanada Towerbirch Project. This is a small 87 km project but an important part of the natural gas infrastructure in NE BC.
  • Enbridge and Spectra announced that their merger was closed and that the combined company is now Enbridge.
  • Trump Watch: Trump gave a speech. Everyone seemed to like it. Then Russia popped up again. I like to call this game Kremlin Whack-a-Mole. Flynn, Sessions, Manafort, Page, Stone, Kushner, Gordon… Wondering who is next.
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