Even Bankruptcy Can’t Slow US Oil Production Much, it Seems

The resilience has extended the timeline in this oil bust.

By Dan Dicker, Oil & Energy Insider:

Is it over yet? 2015 will certainly go down as the worst year for energy stocks since 2008 – that is unless 2016 beats it for misery. Looking at certain sub-sectors, like off-shore drilling, 2016 could unbelievably make 2015 look tame.

We always knew that the bust cycle in oil prices was going to bring a lot of bad times for energy stocks – but no one imagined such carnage, even among the strongest names.

I have been focusing on what I have called ‘the survivors’ and trying to find value in the shares of names like EOG Resources (EOG), Cimarex (XEC) and Hess (HES).  With off-shore drillers, I’ve imagined even more awful times ahead, but took a speculative shot with Seadrill (SDRL), looking down the road two years at the inevitable rebound in deepwater drilling.

But the resilience of many of the unconventional drillers has unexpectedly extended the timeline in this oil bust cycle, catching me by surprise. We’re operating inside this insane Catch-22: Oil prices can’t get constructive until the U.S. and other non-OPEC producers start to trim their outputs, yet oil companies continue to use efficiency gains and top line spending cuts to stay in the game and maintain production.  Oil prices stay low, and drift lower. 2016 will not be happy, at least for the first several quarters.

It gets worse: Oil companies have pushed their debt deftly down the curve, with only a tiny number of high-yielding issues coming due and requiring refinancing this coming year, promising an even more extended period of financial life support.

We’ve seen the wild outcome of a few of the ‘early’ bankruptcies in U.S. independents:  Both Quicksilver Resources and Magnum Hunter have seen their common shares go to zero and been forced to declare Chapter 11, but have also been ordered to continue operations pending break-up or other restructuring.

Even bankruptcy, it seems, can’t slow U.S. production much.

Look, with spending cut to the bone and core wells being run dry with few wells being drilled to take their place, the “Red Queen” of shale production (running as fast as you can to stay in the same place) will most certainly hit a very firm wall, and it will hit it sometime in 2016, of that I’m sure.

But that initial, massive drop in production from unconventional shale may not come in time to save off-shore players – including possibly Seadrill.  We’ve seen this week, for example, the cancellation from Shell (RDS.A) of the remaining time of Transocean’s (RIG) Polar Pioneer contract. There was little surprise in this move as the first exploratory Arctic well came up disappointedly empty, and Shell had already withstood a massive environmental pushback in the Arctic. With several other timing missteps from Shell with regards to the oil and gas market (think BG Group merger), it’s no surprise that Polar Pioneer was given back.

And while RIG will be made whole for the contract time, it does go to a point about offshore in general: Almost all of the time options on current deepwater rigs contracts are being refused by the E+P’s. More and more rigs are going idle, and remain uncontracted further into the future.

As the timeline of destruction gets longer, so do the chances of full-scale default in the deepwater sector. While I had been hoping for a resurgence of offshore contracts in late 2017, it now is possible that the cycle won’t find a turnaround until perhaps 2019 or 2020.

Wow – that makes the risk of holding Transocean (RIG), Noble (NE) or my beloved Seadrill positively depressing.

At current prices, I cannot recommend a sale of Seadrill – it was always a speculative play that I budgeted for possibly going to zero, and I’m willing to let that play out.  And I am definitely not looking for any double-up or averaging of basis prices, either. In fact, it seems certain that both RIG and Noble will see single digit prices in 2016 and Seadrill will sink below 3, if not flirt with the same Chapter 11 fate of both Quicksilver and Magnum Hunter.

And in that, if it’s any consolation, they certainly won’t be alone in the coming year. By Dan Dicker, Oil & Energy Insider

Buckle in. It’s going to be a very long haul. Read… Dealing With The New Oil Price Reality

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  7 comments for “Even Bankruptcy Can’t Slow US Oil Production Much, it Seems

  1. Chris says:

    This is only made possible by the US fiat currency system that allows America to borrow excessively, both publicly and privately, without significant inflationary pressure. The PetroDollar system underpins this system (along with the threat and use of American military force). Moreover, these PetroDollars are reinvested back into the financial sector which in reality are partially reinvested into the domestic shale industry, among others. This industry is only one of many that are almost totally dependent on ZIRP and cheap money. As long as money can be lent out and debts refinanced this industry, as well as many others (and our economy in general), will continue to limp along. Everyone knows that interest rates must be raised but what some may not understand is that whole industries have been established on cheap money and debt. The US and those countries tied into its economic system are in a very compromised position in both the public and private sectors insofar as their debt is concerned. Russia in particular poses an existential threat to this system. We are seeing a no holes barred approach to maintaining the PetroDollar and fiat dollar system. The US will use all means possible to preserve this system. I’m not even remotely confident that the present ruling class of this country will allow for the adoption of a fairer system if it involved ceding any degree of power and wealth. Get ready for protracted proxy wars at best and WWIII along with the resulting devastation at worse.

  2. Yoshua says:

    According to BP the world still has 1.7 trillion proven barrels of oil in place that are technically and economically recoverable. At current rate of consumption at 32 billion barrels a year, we still have oil for 52.5 years. At some point in time the oil will run out though. I guess the question right now is: when will the oil production start to decline due to depletion of wells and fall under the rate of consumption ? When that happens the oil price will spike and oil importing economies will start to collapse.

    I believe that the U.S will do almost anything to keep on pumping oil to keep the price down for as long as possible to buy time. I also believe that we will see more Western military involvement in the Middle East to secure the flow of oil to the West.

    Royal Dutch Shell predicted that Peak Oil would lead to chaos, anarchy and war. Without the unconventional oil production we would have reached Peak Oil today.

    • Matti-- says:

      “I guess the question right now is: when will the oil production start to decline due to depletion of wells and fall under the rate of consumption ?”

      Another important question: what does it cost to get that 1.7 trillion remaining barrels from the ground?

    • Nicko says:

      Renewables are picking up the slack, already economical when compared to Natural Gas power generation, with efficiencies increasing every year as the technologies mature. There will be no oil apocalypse.

    • d says:

      Every-time “A new Tech” innovation proves itself, that 1.7 T number changes, as does the, “Economically recoverable” in it.

      The southern basin of the coast of New Zealand may be one of the “Grandaddy Elephants” left out there. With today’s deep water tech it is uneconomical to attempt to assay it. “to days tech” could be “ancient history” in the morning.

      Oil at over 80 A barrel is fear and speculation, driven by iran.

      Oil at under 20 (Which is what a lot of non premium crude is selling for today) is also down to iran.

      Iran is again trying to use fear in the gulf to raise the price, as it can not do it through OPEC.

      There is plenty of oil, and probably still will be, when we stop using it , in the ecologically unfriendly way we do.

      Like gold, it price has been, and is being, manipulated, hugely. By many players, with opposing agendas..

  3. c smith says:

    “…inevitable rebound in deepwater drilling.”

    Suppose we can find and recover all the crude oil we need in onshore shale formations? Unimaginable a few years ago, but no more. Deepwater is DEAD.

    • night-train says:

      I wouldn’t trash all the off-shore rigs just yet. There are still lots of elephants to be found in deep water. Some of the seismic I saw 5 or 6 years ago showed some extraordinary structures. When oil recovers to a price point that supports shale expansion, the off-shore targets also look good. The almost religious fervor attached to shale is due to hype more so than geology or engineering realities. Shale wells still decline rapidly and may offer little in the way of secondary recovery which accounts for a lot of conventional reservoir production.

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