Wednesday, August 5, 2015 -- Part IV: PAA Takes A Great Fall; DUCs; Gloom And Doom

DUCs

DUCs: the new acronym -- "drilled but uncompleted wells."

Rigzone is reporting:

Asking R.T. Dukes why oil companies are finishing up their drilled, but uncompleted (DUC) wells – bringing even more oil to weigh down an oversupplied market – his answer is simple: business is competitive.

“If this were a monopoly, they probably wouldn’t complete them, but the fact is they’ve got competitors across the globe and across the country. They’ve already spent the money to begin the well,” Dukes, research director at Wood Mackenzie, told Rigzone.

“They’re in the business of producing oil. If they wanted to leave it in the ground and be a storage company, they’d have a different business model.”

Numbering DUCs in the thousands may be a distortion of the true count. DUCs may occur naturally as part of the development of a single pad, which services multiple wells. So they’re a natural inventory for various plays, he said. Looking at the hard number of wells intentionally placed in the DUC stage is between 700 and 800.

Completing those wells will probably spill over into next year, but WoodMac doesn’t believe that when they’re at peak production – estimated between 250,000 to 350,000 per day – and it won’t be enough to move the market.

These guys are much smarter than I but I have trouble accepting the statement that "the hard number of wells intentionally placed in the DUC stage is between 700 and 800."

During the Bakken boom, DUCs peaked in the 425 range, but if the resources had been available, the actual number of DUCs in the Bakken would have been around 250, all things being equal. For argument's sake, let's agree that in the Bakken boom, DUCs peaked in the 425 range.

There may be in excess of 900 wells in DUC status in the Bakken as we speak. That would put approximately 500 wells in DUC status. I think it's quibbling whether this is due to operational reasons (pad drilling). Pad drilling was going to happen, but it's due precisely to the slump in oil prices that pad drilling appears to be the norm now. Whether it's 50% or 90%, I don't know but it is the norm. If it weren't for the low price of oil, we would not see this much pad drilling, and operational delay of fracking would be less.

But if the writer is correct, that with higher prices, DUCs will be completed, but it won't be enough to "move the needle" in terms of overall global production. So, we have all that CAPEX being taken off the market and now we have folks suggesting the DUCs won't move the needle ... and we're talking about $200 oil again.

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This is not an investment site.

Reporting today:

• CLNE: misses by 2 cents; AP report;
• CLR: beats by 9 cents; AP report; transcript to follow;
• DNR: beats by 1 cent, misses on revenue, AP report;
• NOG: beats by 8 cents; transcript to follow;
• SD: a loss of 3 cents per share, but beat estimates by 5 cents; Motley Fool;
• STR: beats by 1 cent, reaffirms guidance; AP report;
• TSO: beats by 57 cents; approves 18% increase to dividend; AP report;

This list may not be entirely accurate; things change. 

Companies reporting yesterday have been posted.

Biggest story for companies reporting yesterday may be Plains All American as reported in The WSJ. PAA shares have dropped more than 12% and is paying almost 7%. This may be the real reason that PAA took such a great fall:

A California pipeline owned by Plains All American ruptured in May, causing an oil spill near Santa Barbara, CA. The company said Tuesday that its 2015 guidance assumes the pipeline won’t return to service this year. As a result, it reduced the midpoint of its outlook for adjusted earnings before interest, taxes, depreciation and amortization by $50 million, to $2.275 billion. [And all the king's men won't put the pipe together again....this year.]

Going through yesterday's list, the opportunities look huge. But remember, this is not an investment site. Do not make any investment decisions based on what you read here or what you think you may have read here.

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In Deep Doo-Doo?

Investopedia sees five frackers, including WLL, CLR, and EOG in deep trouble.

The bottom line. Think about this logically.

Do you think that all five of the companies listed above will suddenly turn their fortunes around and see a v-shaped recovery in their stocks?

The only way that could happen is if oil skyrocketed. Oil will not even see a sustainable lift, let alone skyrocket, since supply is high and demand is low.

Remember, China is significantly overleveraged and is on the verge of the biggest economic collapse in history. Demand for oil will not come from China.

In the United States, the Federal Reserve has done everything in its power to create an artificial landscape of economic growth, but in reality this has only led to debt-fueled growth across numerous industries. Now that these effects are wearing off, we will get to see the real picture, which is deflation.

Oil simply does not rise in a deflationary environment. That being the case, the five companies above are going to have a difficult time.

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Piling On

Reuters concurs:

After slashing spending by $180 billion to deal with one of the worst industry downturns in decades, oil companies are still bleeding cash and slipping further into debt to maintain dividends to shareholders.

Depressed crude prices - at below $50 a barrel Brent crude is half what it was a year ago - mean even more cuts are needed at new projects and existing operations. Companies trying to dispose of oilfields to raise cash could be forced to sell quickly and for less than they hoped.

There is little sign that the oil price will come to the rescue as the Organization of the Petroleum Exporting Countries (OPEC) continues to pump hard into an oversupplied crude market in response to explosive growth in U.S. shale oil.