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Monday, January 2, 2017

How Oil Companies Survived Two Death-Star Events -- January 2, 2017

You've seen much of this page before. There were a number of essays that the graph generated. The third essay was never written because I did not know what I was going to write or how I was going to tell the story how remarkable it was that oil companies survived the two incredible collapses in the price of oil. The graph below suggests that those events were unprecedented.

One "crash" in the price of oil was attributed to the global recession, market meltdown, and financial crisis of 2008 - 2009. The other "crash" was attributed to Saudi Arabia's trillion-dollar mistake to announce that it would no longer cut production to maintain crude oil prices.

In the big scheme of things I was amazed how well the oil sector managed. I wanted to write about that but I was unable to articulate what I was thinking.

Fortunately, The Wall Street Journal has posted a story that explains how the oil companies survived, and how they are now reaping benefits of their actions.
Oil-and-gas companies that sold shares to raise cash during a vicious collapse in the price of crude finished on top in 2016, rewarded when U.S. oil prices finally turned and closed the year 45% higher.

More than 70 North American energy companies sold about $57 billion worth of shares in so-called follow-on stock offerings during the past two years. Many of these shares spent stretches trading below their offering prices, hurting investors who wagered on companies that failed to find footing as well as those who sold out before shares rebounded. A handful of the stock sellers went bankrupt as the price of oil fell by more than half.

But most survived, defying widespread predictions that the plunge in crude and high levels of debt would force many more producers out of business.
It's a great article that should generate a lot of discussion in business schools and corporate boardrooms.


Source: EIA.

Original Post

First Essay 

Looking at the far right side of the graph, three lines, A, B, and C. Essentially those are the three possibilities for 2017:
A) price of oil creeps up, trending toward $75/bbl by the end of the year
B) price of oil remains at present level, $53 +/- $5 per bbl
C) price of oil trends down, toward $40 but not much lower
Likelihood, my opinion:
A) 20% chance
B) 75% likelihood
C) 5% chance
Implications:
A) if the price of oil trends toward but without going over $75: huge win for almost anyone involved in production of oil, including passive investors; consumers see more expensive gasoline but probably not enough to send economy into recession, but nonetheless, painful
B) win-win for everyone, US producers and global consumers; at $50 - $55 barely adequate for Russia, Saudi Arabia, but better than C)
C) not good for anyone, except consumers, but particularly ominous for Saudi Arabia, Russia
Saudi Arabia and Russia would almost be forced to do "anything" to prevent C). Because oil at less than $40 becomes an existential issue for Saudi Arabia, my hunch is that Saudi Arabia would probably do almost anything to keep the price of oil from trending down again.

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Second Essay: Opportunity

The run-up in price the price of oil between 2007 and 2009 (just before the "crash") was critical for the Bakken to boom. Had this run-up not occurred, one can argue the Bakken boom would not have occurred; it most likely would have been significantly delay.
The second opportunity came during the sustained increase in the price of oil after the "crash", from 2009 to 2014. Again, had this price increase not occurred, it's unlikely the Bakken boom would have been sustained.
If folks remember: it was incredibly expensive to explore, drill, frack, obtain leases, put in the roads, put in the pads, obtain the sand, etc., etc., in the early days of the boom. At $50-oil this boom could not have occurred.
Now, in 2016, going into 2017:
  • upfront leases -- incredibly expensive -- are a thing of the past
  • oilfield services are so much less expensive
  • sand is easily obtained, and much less expensive
  • operators using more sand (cheap) and less ceramic (expensive)
  • roads, pads, pipelines, rail -- the infrastructure is all in place (yes, more will be added, but hardly "needed"; and whatever infrastructure is added/"needed" pales in comparison to the story in 2007
  • wells were much less productive in the early days
  • wells costs have come way, way down (less then half?) and production has increased immensely in the first 90 days, and the first full year
  • EURs have gone from 350,000 boe to 1.5 million boe
  • pad drilling, DUCs, permits-in-hand, walking rigs, more effective rigs, better completion techniques now in place
  • work force incredibly experienced; based on accuracy of drilling; speed of drilling
  • geologists understand the Bakken; just before the 2014 crash, the middle Bakken was pretty much all mapped out but the Three Forks first bench hardly explored (by comparison); second, third, and fourth benches hardly explored at all -- handful of deeper wells in the Bakken pool
$100-oil was needed to light the Bakken boom.

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Later, thoughts about the slump in the price of oil in 2008 - 2009; and in 2014 - 2016. [Update: that essay is at the top of this post.]

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