Oil bust of 2015 worse than you thought

While much of Wall Street appears to be at peace with the ‘lower for longer’ oil price slant, new research suggests the industry slump of 2015 was not as bad as we thought stateside; it was actually much worse! 

According to ratings agency Moody's, the oil bust that began in 2015 may turn out to be on par with the telecoms industry collapse of the early 2000s, and worse still it continues to fester. 

Both in terms of the number of recorded bankruptcies, as well as the recovery rates for creditors – 2015 was annus horribilis, with 2016 showing signs of making it look tame.

David Keisman, Senior Vice President at Moody's, says the agency recorded 17 oil & gas bankruptcies in 2015, with 15 coming from the Exploration & Production (E&P) sector, one from oilfield services, and one from drilling. Furthermore, Moody's E&P bankruptcies have accelerated in 2016, with the year-till-date figure about double that for all of 2015.

"The jump in oil and gas defaults that was driven by slumping commodity prices, was primarily responsible for the increase in the overall US default rate in 2015 and continues to fuel it in 2016. When all the data is in, including 2016 bankruptcies, it may very well turn out that this oil & gas industry crisis has created a segment-wide bust of historic proportions," Keisman adds.

That’s because during the telecoms collapse, Moody's recorded 43 company bankruptcies in the three-year period between 2001 and 2003.

Revealing further data, the agency said firm-wide recovery rates for E&P bankruptcies from 2015 averaged only 21%, significantly lower than the historical average of 58.6% for all E&P bankruptcies filed prior to 2015, and the overall historical average of 50.8% for all types of corporates that filed for bankruptcy protection between 1987-2015.

At the instrument level, reserve based loans on average recovered 81%, significantly lower than the 98% recovered in prior energy E&P bankruptcies from 1987-2014. Similarly, other bank debt instruments also on average recovered much less than in previous bankruptcies. For their part, high yield bonds recovered a dismal 6%, compared to a recorded rate in the low 30% in previous E&P bankruptcies.

Finally, Moody’s also notes that “distressed exchanges did little to stave off bankruptcies. More than half of the E&P companies that completed distressed exchanges ended up filing for Chapter 11 bankruptcy protection within a year.”

The agency's sobering take follows those of its ratings industry rivals, with Fitch noting that all European oil majors are likely to generate large negative free cash flows for the full-year 2016, and S&P observing that energy and natural resources segment has the highest concentration of global corporate defaults by sector accounting for 65 issuers, or 56%, of the 117 defaults worldwide in the year to August-end. 

Away from industry doom and gloom, and just before yours truly bids goodbye to the Big Apple, one had the invitation to attend the ICIS Kavaler Award Gala reception sponsored by the Chemists Club at the City’s Metropolitan Club. 

This year’s winner was British serial Industrialist Jim Ratcliffe, the founder of chemicals firm Ineos. According to ICIS, Ratcliffe is the first foreign winner of the award, decided by his peers in the chemicals business. 

Pre-gala, the Oilholic had a drink to that; albeit one which was shaken not stirred, quite like much of the oil & gas industry is at the moment. That’s all from New York folks, with Pittsburgh, Pennsylvania calling next! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo 1: Wall Street Signage, New York, USA. Photo 2: The Oilholic in The Big Apple © Gaurav Sharma, September 2016

Views from Wall Street on oil market volatility

The Oilholic finds himself 3,460 miles away from London in New York, with Wall Street giving the crude market yet another reality check. In the last few months, money managers of all description, not just our friends in the hedge fund business, are scratching their heads having first seen a technical bear market in July, only for it to turn in favour of a technical bull market in August!

But now, with all that phoney talk of producers coming together to freeze oil production having fallen by the wayside, both Brent and WTI have started slipping again. 

Not one Wall Streeter the Oilholic has spoken to since arriving in the Big Apple seems to discount the theory that oil may be no higher than $50 per barrel come Christmas, and even that might be a stretch. 

In a desperate bid to keep the market interested in the production freeze nonsense, the Saudis and Russians pledged cooperation ensuring "oil market stability" at no less august a venue than the G20 summit in China earlier this month. Of course, as no clear direction was provided on how that "stability" might actually be achieved and nothing revealed by way of production alterations or caps, not many are quite literally buying it – not on Wall Street, not in the City of London.

Forget the shorts, even the longs brigade have realised that unless both the Saudis and Russians, who between them are pumping over 20 million barrels per day (bpd) of oil, announce a highly unlikely real terms cut of somewhere in the region of 1 to 1.5 million bpd at the producers’ informal shindig on the sidelines of International Energy Forum (due 26-28 September) in Algiers, price support would be thin on the ground.

In fact, even a real terms cut would only provide short-lived support of somewhere in the region of $5-10 per barrel. As a side effect, this temporary reprieve would boost fringe non-OPEC production that is currently struggling with a sub $50 oil price. Furthermore, North American shale production, which is proving quite resilient with price fluctuations in the $40-50 range, is going to go up a level and supply scenarios would revert to the norm within a matter of months.

A number of oil producers would substitute the hypothetical 1-1.5 million bpd Riyadh and Moscow could potentially sacrifice. That’s precisely why Wall Street is betting on the fact that neither countries would relent, for among other things – both are also competing against each other for market.

Another added complication is the uncertainty over oil demand growth, which remains shaky and is not quite what it used to be. Morgan Stanley and Barclays are among a rising number of players who think 2016 might well end-up with demand growth in the region of 625,000 to 850,000 bpd, well shy of market think-tank projections of 1.3 million bpd.

Trading bets are mirroring those market concerns. Money managers sharply decreased their overall bullish bets in WTI futures for the week to September 6th, and also reduced their net position for a second straight week, according to Commodity Futures Trading Commission (CFTC) data.

In numeric terms - "Non-commercial contracts" of crude oil futures, to be mostly read as those traded by paper speculators, totalled a net position of +285,795 contracts. That’s a change of -55,493 contracts from the previous week’s total of +341,288; the net contracts for the data reported through August 30th.

The speculative oil bets decline also dragged the net position below the +300,000 level for the first time in nearly a month. That’s all for the moment from New York folks, as the Oilholic leaves you with a view of Times Square! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo 1: Wall Street & New York Stock Exchange, USA. Photo 2: Times Square, New York, USA © Gaurav Sharma, September 2016

Fuel hedging as oil stays ‘lower for longer’

The last decade has seen extreme volatility with unprecedented price swings. Having been at $115 per barrel in June 2014, oil slipped below $30 at one point in less than two years, driven lower by overproduction, harking back to the kind of volatility we saw during the global financial crisis of 2008-09. 

While the latter was down to a dip in demand, and the former is being caused by oversupply sentiment, volatility makes hedging crucial for fuel consuming companies. Two experts from financial consulting firm Volguard – Simo Mohamed Dafir and Vishu N. Gajjala – have made a brilliant attempt to tackle subject via their book Fuel Hedging and Risk Management published under the current batch of the Wiley Finance series.

Acknowledging the turbulent times faced by fuel derivative providers, Dafir and Gajjala, set about offering their own hedging solutions to those hoping to manage fuel price volatility, by putting forward strategies from origination to execution of a hedge within confines of a holistic risk management structure.

This book, of just under 300 pages split by 10 detailed chapters, begins with a basic overview of inherent market risks and the strategic nature of the oil and gas business, before moving on to tackling fuel derivative instruments.

Subsequent strategic dialogue moves on to scenario analysis, derivative term sheets and market curves for those starting out on their careers. Concurrently, advanced practitioners in the fuel derivatives market will appreciate Dafir and Gajjala’s treatment of price, volatility and exposure optimisation models, as well as credit risk and associated Company Voluntary Arrangement [or “CVA”] cost examinations.

Key bits of the text are accompanied by detailed case studies and examples treating real-life trading scenarios. The Oilholic feels such a format helps readers appreciate the tone and complexity of risk management of derivatives far better than a bland linear treatment of the subject. One find’s the narrative is just as useful for established players, as well as newcomers to the fuel hedging world.

However, this blogger would attach a caveat – for those contemplating a career in the fuel hedging business – Dafir and Gajjala’s work is not a starter kit, rather a very solid, splendid second title that serves as a constructive follow-up to an initial baptism to the derivatives world. 

The Oilholic would be happy to recommend this book to commodity traders seeking a refresher course, quantitative professionals in the fuels space, risk managers and corporate treasurers at transportation firms, including airlines and shipping businesses whose needs and concerns it directly addresses. It could also be of immense help to those looking to develop a corporate framework for financial risk analysis.

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© Gaurav Sharma 2016. Photo: Front Cover – Fuel Hedging and Risk Management © Wiley Publishers, 2016

Threat of the other & US energy security

The intertwining of US foreign policy with the country’s energy security has been a matter of public discourse for decades. The connection only witnessed a dilution of sorts roughly six years ago when the US shale bonanza started easing the economy’s reliance on oil imports in meaningful volumes. 

In an era of ‘lower for longer’ oil prices and shale’s contribution to US energy security being hot topics, author Sebastian Herbstreuth refreshingly reframes the country’s ‘energy dependency’ as a cultural discourse via his latest book – Oil and American Identity published by I.B. Tauris. 

In a book of 270 pages, split by six detailed chapters, Herbstreuth attempts to draw and examine a connection between the US energy business and American views on independence, freedom, consumption, abundance, progress and exceptionalism.

Stateside, foreign oil is selectively depicted as a serious threat to US national security. However, that selective depiction is contingent upon the ‘foreignness of foreign oil’ to quote the author. Herbstreuth shows how even reliable imports from the Middle East are portrayed as dangerous and undesirable because the region is particularly 'foreign' from an American point of view, while oil from friendly countries like neighbouring Canada is cast as a benign form of energy trade.

The author has somewhat controversially, and rather brilliantly, recast the history of US foreign oil dependence as a cultural history of the world’s largest energy consumer in the 20th Century.

That age-old concern about there being an existential threat to the US, as a society built on the internal combustion engine and mobility, is in part born out of the very cultural fears flagged by the author in some detail.

The striking thing is that the fear still lurks around despite the rising contribution of US shale oil and gas to US energy security. Reading Herbstreuth’s work you feel that in many ways the said fear slant is never going to go away, for it is as much a cultural issue as a geopolitical or economic one, neatly packaged by the political classes for the ultimate ‘Hydrocarbon Society’.

The Oilholic would be happy to recommend Oil and American Identity to fellow analysts, those interested in the oil and gas business and cultural studies students. Furthermore, a whole host of readers looking to ditch archaic theories and seeking a fresh perspective on the crude state of US energy politics would find Herbstreuth’s arguments to be pretty powerful.

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© Gaurav Sharma 2016. © Photo: Front Cover – Oil and American Identity © I.B. Tauris, 2016.

On crude producers’ talks, analysts & academics

As the second month of the third oil trading quarter of 2016, comes to a close both Brent and WTI futures remain in technical bull territory despite a recent cooling down of oil prices. 

The Oilholic is struggling to find any market analysts – including those at UBS, Commerzbank, Morgan Stanley or Barclays to name a few – keeping their faith in (a) the oil producers’ talks pencilled in for end-September producing anything tangible, and (b) whether an output freeze would actually work with oil production in Russia and Saudi Arabia at record highs. 

A real terms cut in production could provide a short-term boost to prices but it does not appear to be even a remote possibility at this point. Yet, the long callers continue to bet on an uptick if the latest US CFTC data is anything to go by. As the Oilholic pointed out in July, demand projections continue to head lower, so yours truly did ask the question in a recent Forbes piece – are the talks as much about stabilising oil supply, or a likely post-Sept dip in China’s demand.

As for viewing the oil price via the prism of demand permutations, Fitch Ratings’ latest assumption for ratings purposes just about sums it up. The rating agency assumes Brent and WTI will average $42 per barrel in 2016, up from its $35 base case in February.

“However, we do not believe that the rapid price recovery seen in the first half of 2016 will continue. The sub-$30 prices at the start of the year approached cash costs for many producers and were unsustainable in all but the very short term. Prices in the $40-$50 range allow most producers to break even on a cash basis, if not to cover sunk costs,” it added. 

Furthermore, market expectations that US shale production will begin to rebound at prices above $50, will keep prices below that level until a supply deficit has eroded some of the inventory overhang.

Away from market shenanigans, another one of those research papers predicting there are no viable alternatives to oil and gas for meeting global energy needs arrived in the Oilholic’s mailbox. This one is from the Head of Petroleum Geoscience and Basin Studies research and Chair of Petroleum Geoscience at University of Manchester Dr Jonathan Redfern and energy recruiters Petroplan; overall an interesting read. 

Sticking with ‘crude’ academic papers, another interesting one was published this month by Luisa Palacios of Columbia University’s Center on Global Energy Policy charting Venezuela’s growing risk to the global oil market.

The country’s problems are well documented, but Palacios claims glaring losses in oil production have "yet to translate into a commensurate fall in oil exports", due to the heavy toll taken by the economic collapse on domestic demand. (PDF download link)

Furthermore, the stability of exports reflected in the data in first half of the year "masks a deteriorating trend with June exports already more than 300,000 barrels per day lower than last year’s average."

Despite all the headline noise about Venezuela, the most severe risks to oil markets thus still lie ahead. Certainly food for thought, but that’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Oil platform © Cairn Energy Plc. 

Pump more, even if oil price slumps more mantra

As oil remained in a technical bear market for much of July, we saw well timed quips by major oil producing nations, within OPEC and beyond, fanning chatter of another round of talks aimed at freezing production. And well, its done the trick – both Brent and WTI futures have bounced back from the their low point of August 2, to an above 20% rise as the Oilholic writes this post, i.e. a technical bull run!

Yours truly cannot consciously recommend buying into this phoney rally, because any talks between OPEC and non-OPEC producers face the same impediments as last time, with Iran and Iraq remaining non-committal, and those calling for a freeze (Saudi Arabia and Russia) only willing to do so at record high levels of production. For the Oilholic’s detailed thoughts on the issue, via a Forbes post, click here. 

However, it’s not just National Oil Companies who are in full on production mode. It seems the largest independent US and Canadian oil exploration and production (E&P) companies are still paying their executives more to focus on boosting production and replacing reserves, rather than conserving capital and reducing debt, according to Moody's.

Only four companies of the 15 companies, the ratings agency sampled in July, even included debt-reduction goals as part of their broader financials, or balance-sheet performance goals. For example, Pioneer Natural Resources (rated by Moody’s Baa3 stable) included a ratio of net debt-to-EBITDAX to account for 15% of its executives' target bonus allocation.

Fourteen of the sampled companies use performance award plans linked to relative total shareholder return. Christian Plath, Senior Credit Officer at Moody's, opined that the strong and direct focus on share prices raises certain credit risks by rewarding aggressive share repurchases and the maintenance of dividends even when cutbacks would be prudent.

“The focus on shareholder returns also reflects the E&P companies' high-growth mindset, and may motivate boards and managers to focus on growth over preserving value. Nearly all of the awards are in some way linked to share-price appreciation. While large companies generally try to tie long-term pay closely to share-price performance, the link appears stronger in the E&P sector,” he said. 

Furthermore, Moody’s found that despite the slump in oil prices that has dented E&P company returns, production and reserves growth targets still comprised almost a quarter of named senior executives' target bonuses in 2015.

“This makes it the most prevalent metric in annual incentive plans ahead of expense management and strategy. Given our pessimistic industry outlook, this system of compensation is negative for credit investors and suggests that many E&P companies are finding it difficult to shed their high-growth strategies," Plath added.

Drawing a direct connection between what Moody’s says from a sample of 15 North American E&P companies and the gradually rising US and Canadian rig counts would be an oversimplification of the situation.

However, taken together, both do point to producers stateside either getting comfortable in the $40-50 per barrel price range or finding ways of carrying on regardless with the full backing of their paymasters. Any price boosting production freeze by global oil producers will be warmly welcomed by them. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic.

Those rapidly sliding oil demand projections!

It’s been another mad month for the Oilholic and might one add for the oil markets as well. At the conclusion of the OPEC summit in Vienna back in June, there was a sense that a slow, but sure road to rebalancing somewhere between March and June 2017 would be the order of the day.

Then Brexit happened, Italian banks crisis escalated, Chinese refiners driven on by cheaper crude imports ensured a gasoline glut hit the Asia Pacific market, while US refiners went on a binge largely off cheap Iraqi imports.

Donald Trump and his protectionist stance remains fighting fit as a painfully long US presidential election campaign finally enters its final phase. China’s economy remains lethargic, as do global central banks when it comes to monetary stimulus – Bank of Japan, US Federal Reserve, Bank of England – take your pick.

Put it all together and factor in the return of barrels, taken out earlier this year, from Canada to Nigeria, Venezuela to Colombia, and you come up with nothing other than a bearish market as July draws to a close. In fact, oil benchmarks are down 20% since the OPEC summit, and with good reason – neither is demand going anywhere, nor is oversupply dissipating.

However, it’s demand woes that are knocking market sentiment more at the moment. OPEC and IEA continue to maintain global oil demand growth projections for 2016 in the region of 1.2-1.4 million barrels per day (bpd). Given the current set of market circumstances, yours truly is not at peace with the said range. City analysts aren't either.

Barclays' commodities research team reckons demand is likely to be in the region of 1.1 million bpd, several others put it around 1 million bpd, but last week Morgan Stanley said even its conservative forecast of 800,000 bpd might not be met.

In a note to clients on July 24, the investment bank’s analysts subsequently wrote: "We are cutting our forecast for global refinery demand for crude oil (runs) to 625,000 bpd from 800,000 bpd on expected run cuts, with downside risk to these low numbers.

"We also recently lowered our third quarter average Brent price forecast from $50 per barrel to $45, and see more downside risk."

In fact, downside risk is likely to become the order of the day, week and month. As the Oilholic said on TipTV, there is little out there to fire-up demand. Finally, while the mad month ensured the Oilholic didn’t blog here as frequently as he’d like, here are some of one’s market quips in IBTimes UK and Forbes over the last few weeks. 

There’s of course the little matter of Shell’s 72% decline in quarterly profit, British Gas owner Centrica’s continued loss of UK customers, and of course whether BP is finally getting its house in order. 

Here is one’s take on demand fears, and last but not the least – Russia upping its oil production ante. That’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA © Todd Gipstein / National Geographic.

Crude markets post Brexit: Keep calm & carry on

Right after the OPEC summit, we went into the home strait of the UK’s June 23rd referendum on its membership of the European Union, which has resulted in a Brexit or to put it more blandly – Britain’s exit from the EU.

 

It drained the life out of talking about anything else, or writing about anything else or blogging about anything else. So please accept the Oilholic’s apologies for not responding on wider ‘crude’ affairs via this blog for much of the month.

 

The deed is done; the British public voted 52% to 48% in favour of exiting the European Union, and to quote one departing EU official – "what has been done cannot be undone." The development followed a predictable market kerfuffle, with some comparing or at least attempting to compare its aftermath to the Lehman Brothers collapse. As the Oilholic said on a recent broadcast, serious though it might be, it is not quite on that scale for the oil markets.

 

Oil will continue to lurk around the $50 per barrel level and struggle to cap that over the next six months, and much of it would have little direct connection to the Brexit vote. On the eve of the vote, yours truly looked at FX, oil and gold plays via a Forbes column, and did an oil market impact assessment or a crude Brexit post mortem exactly a week on from the outcome of the result.

 

Brexit’s only contribution has been to add to the prevailing market sentiment that oil demand growth will not quite fire up. Most demand growth projections, for instance those of the IEA and OPEC, are in the 1.2 – 1.4 million barrels per day (bpd) range. The Oilholic suspects come the end of the year, even the lower end of that range might not be matched.

 

Brexit and the uncertainty in Europe would have some impact, but much of the oil market is reliant on emerging market demand and its direction should be the primary cause for concern. Europe accounts for only 15% of global trade. The direction of global trade and manufacturing is eastwards, by default so is the direction of the oil market.

 

Furthermore, there is still plenty of oil around according to physical traders. What was one of the biggest oil gluts of all time last year, will not be resolved in a matter of months. The Oilholic has always maintained that the oil market will not rebalance until much later into 2017 and the oil price will stick around $50 level until December.

 

Given that context, Brexit is just another crude problem, but not the only problem. Keep calm and carry on!

 

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© Gaurav Sharma 2016. Photo: Oil rig in South Asia © Cairn Energy.

A Saudi briefing, Iran's barrels & OPEC’s Sec Gen

Half of the world’s press descended on the OPEC HQ, in Vienna, Austria, half expecting that not much will transpire here. And well, that is exactly what happened when proceedings ended on 2 June – except that there were certain key developments before, after and during the 169th OPEC ministers’ meeting, some subtle and some not so subtle!

Let’s start with the subtle – for the first time in three years, a Saudi prince accompanied his country’s delegation to OPEC flanked by a new oil minister in the shape of Khalid Al-Falih. The Saudi delegation largely kept mum as far as the press goes in the lead up to the conference, but the prince himself took time to hold and address an off-record briefing with oil market analysts away from the prying eyes of the media.

Off-record means what it says on the tin dear readers, as the Saudis wanted the press out of it. So the Oilholic has to respect that; even though one got a 100% lowdown via third parties! Yours truly can however share some nuggets minus specifics.

The Saudi delegation, a veritable who’s who of the country’s energy industry, made the slickest presentation in recent memory and in the Oilholic’s opinion perhaps the most data heavy one too. It sounded like Saudi Arabia was making a concerted effort to tell the wider world it meant business when it comes to the diversification of its economy, but make no mistake - the briefing on the eve of the 169th OPEC conference was about something else entirely.

The proverbial kings – as they are of the oil and gas world – appeared to be preparing for a game of chess. As the Oilholic and selected colleagues yours truly has known for years read it – ‘wethinks’ the Kingdom has thrown the production stakes gauntlet back to Iran, which has been asserting its right to pump as much oil as it likes in a post sanctions-era.

The Islamic Republic has made no secret of its desire to bump up production to 4 million barrels per day (bpd) within a year. Never say ‘never’, but the Oilholic has made no secret of his conjecture either that the chances of that happening given infrastructural impediments, above anything else, are slim to negligible. One suspects experts advising the Saudis know just as much.

So the Saudis reckon they may as well throw the gauntlet back to Iran. “You want to pump 4 million bpd let’s see you do it, and if you do well and good – our ‘crude’ client base is intact we’ll pump what we want to.” Now you might think that suggests OPEC stays where it is, but not quite.

That’s because the Saudis (and by extension other Gulf exporters) would potentially use this as the basis of future OPEC dialogue, whether or not Iran gets to that level. Moving on from the subtle off-record stuff to the not-so-subtle on-record buzz on summit day, an ancillary thought was whether or not OPEC will appoint a new Secretary General to replace the long standing Abdalla Salem El-Badri, who has been officiating in an “acting capacity” since 2013.

Internal discord, and tension between the Iranians and the Saudis meant the oil producers’ collective, while even agreeing to readmit a net importer in the shape of Indonesia, could not get itself to agree on a compromise candidate for the post. And so El-Badri went on and on, and well on and on. 

However, finally Mohammed Sanusi Barkindo, from Nigeria, was named as Secretary General with effect from 1st August 2016, for a period of three years, bringing to a close a near decade-long term of his predecessor. Additionally, Gabon was readmitted to OPEC after having left in 2014. 

So all-in-all, it was not a mundane affair at all, with some sense of solidarity within what is soon to become a 14 member oil producing block. Perhaps a little solidarity is all what the market was seeking from OPEC at a time of low expectations. That’s all from the 169th OPEC ministers’ meeting folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Exterior of OPEC Secretariat in Vienna, Austria © Gaurav Sharma.

OPEC issues no word on quota (again!)

The 169th OPEC ministers meeting has concluded in Vienna, Austria with the producers' collective yet again failing to reveal its 'official production quota'. 

But analysts took heart from the fact that OPEC finally appointed a new Secretary General - Nigeria's Mohammed Sanusi Barkindo - to succeed Abdalla Salem El-Badri.

There might well be discord with respect to Iran's bid to ramp production up to 4 million barrels per day, but the appointment of a compromise candidate as Secretary General is definitely a step in the right direction for us lot in the analyst community.

OPEC also observed that since its last meeting in December 2015, crude oil prices have risen by more than 80%, supply and demand is converging and oil and product stock levels in the OECD have recently shown relative moderation.

Additionally, Gabon will be readmitted to the OPEC fold with effect from 1 July, taking OPEC's membershp up to 14, having already readmitted net oil importer Indonesia last year.

Finally, the next OPEC meeting is on 30th November. That’s all for the moment from Vienna folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Press conference at the conclusion of OPEC's 169th Ministerial Meeting in Vienna, Austria © Gaurav Sharma, June 2, 2016.

‘Mum’s the word’ for new Saudi oil minister

After a fact finding trip to Houston, Texas, the Oilholic finds himself back in Vienna, Austria for the 169th OPEC Ministers’ meeting. Based on initial soundbites, the 13 member oil producers’ collective is in a rather content mood. Well if you exclude the Venezuelans that is, who are decidedly grumpy by virtue of their own circumstances.

Recent production outages in Canada, Colombia, and OPEC members Venezuela and Nigeria have served to support the oil price which has lurked around the $50 per barrel level for a while now. It is also now manifestly apparent that non-OPEC oil producers are suffering in an era of lower for longer oil prices. 

The Oilholic recently penned his thought on troubles of US shale players – flag bearers of non-OPEC production – in a Forbes piece, and that’s not where the trouble ends. Non-OPEC production as a whole remains in a precarious spot. Nonetheless, interpretation of the market situation differs from OPEC member to member, with the Venezuelans correctly querying where the oil price would go once outages end. 

There’s plenty of chatter here ahead of the meeting, but one man has largely kept mum – that’s none other than Saudi Oil Minister Khalid Al-Falih, who replaced Ali Al-Naimi, one of OPEC’s most colourful characters last month.

It is doubtful that a new minister would alter an old Saudi policy. But the new man in charge has stayed away from the media since his arrival on Tuesday. Much to the disappointment of the world’s scribes, there was no Al-Naimi style power walk on Vienna’s Ring Road by new man either.

As for the analyst community, none of us expect any movement on the production quota front, although the rumour mill suggests OPEC might well be on the verge of finally appointing a new Secretary General. For an OPEC preview, check out the Oilholic’s submission to the International Business Times.

Finally, just before one takes your leave, here are two Forbes posts – on Mexico’s upcoming offshore round and US exports respectively – to keep you busy. That’s all for the moment from Vienna folks, plenty more to follow over the coming days! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: OPEC flag © Gaurav Sharma.

On non-OPEC distress & the road ahead

Having spent the entire week gauging the oil market mood in Houston, Texas, several key themes seem to be emerging. US shale oil exploration has come to symbolise non-OPEC production rises over the past three years and how it performs over the coming years would go some way towards providing an indication on when the market rebalances and where the oil price goes from here.

In that respect, the Oilholic’s third outing at the Baker & McKenzie Oil & Gas Institute provided some invaluable insight. Delegates at the Institute and various panels over the course of the event invariably touched on the subject, largely opining that many fringe shale players might well be on life support, but the industry as a whole is not dead in the water (see above left).

The problem is the paucity of high-yield debt for the oil & gas sector, where private equity (PE) firms were supposed to step into the breach vacated by big banks, but it is something which is not (currently) being meaningfully reflected in the data. 

One got a sense, both at the Institute and via other meetings across town, that PE firms are not quite having it their own way as buyers, and at the same time from sellers’ perspective there is also a fair bit of denial in a cash-strapped shale industry when it comes to relinquishing asset, acreage or corporate control.

Sooner, rather than later, some struggling players might have little choice and PE firms might get more aggressive in their pursuit of quality assets over the coming months, according to Mona Dajani, partner at Baker & McKenzie.

“You must remember that the PE market is quite cyclical. The way I view it, now would be as good a time as any for a PE firm to size-up and buy a mid-sized exploration and production (E&P) company as the oil price gradually creeps upwards. Jury is mixed on bid/ask differentials narrowing, but from what I see, it is happening already,” she added. 

William Snyder, Principal at Deloitte Transactions and Business Analytics, said, “To an extent hedge positions have protected cashflow. Going forward, PE is the answer right now, for it will be a while before high-yield comes back into the oil & gas market.”

The Deloitte expert has a point; most studies point to massive capital starvation in the lower 48 US states. So those looking to refinance or simply seeking working capital to survive currently have limited options. 

Problem is the PE community is cagey too as it is embarking on a learning curve of its own, according to John Howie, Managing Director of Parallel Resource Partners. “Energy specific funds are spending time working on their own balance sheets, while the generalists are seeking quality assets of the sort that have (so far) not materialised.”

Infrastructure funds could be another option, Dajani noted. “These (infrastructure) funds coming in at the mezzanine level are offering a very attractive cost of debt, and from a legal perspective they are very covenant light.”

Nonetheless, given the level of distress in the sector, the Oilholic got a sense having spoken to selected PE firms that they are eyeing huge opportunities but are not willing to pay barmy valuations some sellers are coming up with. The thinking is just as valid for behemoths like BlackRock PE and KKR, as it is for boutique energy PE specialists from around the US whom Houston is playing host to on a near daily basis these days. 

There are zombie E&P companies walking around that should not really be there, and it is highly unlikely that PE firms will conduct some sort of a false rescue act for them at Chapter 11 stage. Better to wait for the E&P company to go under and then swoop when there is fire-sale of assets and acreage. 

Nonetheless, while we are obsessing over the level of industry distress, one mute point is getting somewhat lost in the ruckus – process efficiencies brought about by E&P players in a era of ‘lower for longer’ oil prices, according to John England, US Oil & Gas Leader at Deloitte (see right, click to enlarge). 

Addressing the Mergermarket Energy Forum 2016, England said, “Of course, capital expenditure cuts have triggered sharp declines in rig counts globally except for the Middle East. However, production decline has not been as steep as some in the industry feared. 

“This has been a tribute to the innovations and efficiencies of scale across North America, and several other non-OPEC oil production centres. A sub-$30 per barrel oil price – which we recently saw in January – drives innovation too; for a lower oil price environment motivates producers to think differently.”

Over nearly twenty meetings spread across legal, accounting, financial and debt advisory circles as well as industry players in Texas, and attendance at three industry events gives one the vibe that many seem to think the worst is over.

Yet, the Oilholic believes things are likely worsen further before they get better. Meanwhile, Houston is trying to keep its chin up as always. That’s all from the oil & gas capital of the world on this trip, as its time for the plane home to London. Keep reading, keep it crude!

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© Gaurav Sharma, 2016. Photo I: Panel at the Baker & McKenzie Oil & Gas Institute 2016 © Lizzy Lozano, Baker & McKenzie. Photo II: John England of Deloitte addresses the Mergermarket Energy Forum 2016 © Gaurav Sharma.

ExxonMobil's Ghost Building in Houston

On the way to business meetings on Louisiana and Bagby Street in downtown Houston, Texas, earlier this week, the Oilholic cut across Bell Street passing by number 800, which of course was once ExxonMobil’s downtown office, with the top two floors being the dining space for the Petroleum Club of Houston (PCOH).

Alas no more, as all former occupants of the building have moved to the oil giant's sprawling campus in Spring, TX close to The Woodlands north of George Bush Intercontinental Airport. That’s excluding the PCOH which is now at the nearby Total Plaza.

According to the Houston Chronicle’s archives, Shorenstein Properties closed on the property for anundisclosed amount in the first quarter of 2013 with plans for making changes and improvements following ExxonMobil’s departure.

However, the oil giant has since leased back the entire building and not much has happened. Plans to move local government agencies into the building or other private tenants for that matter haven’t quite worked out either.

Shame the city and the building’s owners can’t work out what to do with the historic offices built in 1963 which ExxonMobil occupied until recently (see right). Downtown area of the oil and gas capital of the world could well do without another ghost building, having had one nearby left behind by Enron's collapse until Chevron moved in years later. That’s all for the moment from Houston folks; keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo 1: 800 Bell Street, Houston, Texas, USA in 2016. Photo 2: The building's exterior in 2010. © Gaurav Sharma.

It’s about the ‘crude’ bid/ask differential stupid!

That there are distressed oil and gas assets stateside is pretty obvious. The damage was done, or rather the distress was caused, long before the crude oil price started lurking in its current $40-50 per barrel range, with no guarantees and only calculated guesses on where it is going next.

Actually, nowhere but the current range, as some, including the Oilholic, say. We’d agree that the high yield debt market is in the doldrums, and pretty much since the oil price slump began in 2014 we are told private equity players are sizing up the level of distress and waiting for a timely swoop for assets armed with billions of dollars. 

There is only one problem – the bid/ask differential. Some, not all, sellers of distressed assets are still in denial and holding out for a better price. Buyers themselves, to be read as private equity buyers, are no mugs either and won’t buy any old asset at any old price. It then bottles down to the buying the right asset at the right price in a high stakes game, to quote not one but several of this blogger’s friends who addressed the Baker & McKenzie Oil & Gas Institute.

Then again other industry contacts, whom yours truly interacted with at the Mergermarket Energy Forum, say there is evidence of the bid/ask differential narrowing considerably relative to last May because some sellers literally have no choice and are desperate.

But now the PE guys want ‘quality’ distressed assets and some, as has become apparent in the Oilholic’s discussions with no less than 20 industry contacts and having participated in three oil and gas events (and counting) since Monday.

Anecdotes go something like this – some PE firms no longer want to buy an asset from a distressed oil and gas firm in Chapter 11 bankruptcy proceedings, but rather wait for it to actually go bust and then go for the target asset on much better terms, despite the obvious risk of losing out on the deal should another suitor emerge during the game of brinkmanship.

The debate will rumble on for much of 2016 with close to 70 US oil and gas firms having filed for bankruptcy this year alone! You get a sense in Houston that PE firms have the upper hand, but aren’t having it quite their own way, just as plenty of zombie small to mid-sized oil and gas companies that do not deserve to survive continue to muddle along. That’s all for the moment from Houston folks; keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Oil pump jacks in Texas, USA © National Geographic Society.

Gauging crude sentiments in Houston Town

The Oilholic is back in Houston, Texas for a plethora of events and another round of crude meetings. The weather in the oil and gas capital of the world at the moment seems to be mirroring what’s afoot in the wider industry, for there's rain, clouds, thunderstorms and the occasional ray of sunshine.

The industry’s mood hasn’t progressively darkened though; in fact it’s a bit better compared to when yours truly was last here exactly 12 months ago. Dire forecasts of $20 per barrel have not materialised, and forecasts of shale players in mature viable plays surviving at $35+ per barrel are appearing to be true. Additionally, the oil price is sticking in the $40-50 range.

That’s not to say another round of hedging will save everyone; bankruptcies within the sector continue to rise stateside. On the plus side US oil exports are now permitted and the speed with which President Barack Obama did away with a decades old embargo came as a pleasant surprise to much of the industry both within and beyond Houston. 

Finally, the US Energy Information Administration's recently released International Energy Outlook 2016 (IEO2016) projects that world energy consumption will grow by 48% between 2012 and 2040.

Most of this growth will come from countries that are not in the Organization for Economic Cooperation and Development (OECD), including countries where demand is driven by strong economic growth, particularly in Asia, says the Department of Energy’s statistics arm. Non-OECD Asia, including China and India, account for more than half of the world's total increase in energy consumption over the projection period. 

Plenty of exporting potential for US oil then! That’s all for the moment from Houston folks; keep reading, keep it crude!

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© Gaurav Sharma 2016. Photo: Downtown Houston, Texas, US © Gaurav Sharma.

Adios Ali: Saudi oil minister retires

Alas all 'crude' things in life come to an end, with King Salman replacing Ali Al-Naimi – Saudi Arabia’s oil minister who has been a regular feature at OPEC for over 20 years – with Khalid Al-Falih, chairman of state-owned oil giant Saudi Aramco.

It seems Al-Naimi’s outing to OPEC in December 2015 was the eighty-year old industry veteran’s last. For over two decades as oil minister, and a professional career extending well beyond that, Al-Naimi witnessed the oil price soar to $147 per barrel and plummet as low as $2, and by his own admission everything that needed to be seen in the oil markets in his service to Riyadh.

Every single OPEC minister’s summit the Oilholic has attended since 2006 has almost exclusively revolved around what Al-Naimi had to say, and with good reason. For the mere utterance of a quip or two from the man, given the Saudi spare capacity, was enough to move global oil markets. 

Since 2014, he doggedly defended the Saudi policy of maintaining oil production for the sake of holding on to the Kingdom’s market share in face of crude oversupply. Both under, King Fahd and King Abdullah, Al-Naimi near single-handedly conjured up the Saudi oil policy stance. But King Salman has gone down a different route.

The new oil minister Al-Falih will undoubtedly draw the biggest crowd of journalists yet again at OPEC given the Saudi clout in this crude world. However, Al-Naimi leaves behind some big running shoes to fill, and perhaps his predecessor’s signature pre-OPEC power walk (or was it a jog) on Vienna’s ring road with half of the world’s energy journalists in tow chasing him around the Austrian capital!

For the Oilholic it has been an absolute joy interacting with Al-Naimi at OPEC. Somehow things will never be the same again at future oil ministers' meetings, and that’s just for the scribes to begin with. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2016. File photo: Ali Al-Naimi, former oil minister of Saudi Arabia © Gaurav Sharma.

Refreshing take on tackling a downturn

Does the thought of a recession spook you? Are memories of the last economic downturn in the wake of the US subprime mortgage crisis fairly raw? It might well be hard to avoid an economic downturn, but your chances of escaping unscathed and managing the situation depend on your tenacity and desire to rethink life as you know it, according to economist Jason Schenker.

Hammering home this central theme is his book – Recession-Proof: How to Survive and Thrive in an Economic Downturn released earlier this year by Lioncrest Publishing – which makes you sit up and take notice of both the obvious and the not so obvious when it comes to your career, investment and lifestyle choices versus the evolving macroeconomic climate.

The engaging tone of Schenker’s work spread out over 200 pages split by 11 chapters stands out. The book is full of practical suggestions, a pragmatic dose of stating of what’s evident (which some of us tend to ignore at our peril), a gentle nudge towards constructive soul searching and last, but not the least, one of the most refreshing elucidation of SWOT (strengths, weaknesses, opportunities, and threats) analysis that the Oilholic has read in recent years.

To quote the author, “a recession is partly a self-fulfilling prophecy. It happens partly because we think it’s going to happen. But that doesn’t make it any less real, or any less inevitable…It’s like that famous line in Dirty Harry: “Are you feeling lucky, punk?” When people are feeling lucky, there’s growth. When people aren’t feeling lucky, there’s contraction.”

And being prepared for all eventualities is what is required in this day and age of turbulence where fear and greed are seen to be driving markets, Schenker adds. Instead of feeling sorry in the event of a recession be bold, or better still spot economic turbulence before its hits your company, life and finances, all three of which are intertwined in more ways than one.

Schenker explains how he went about staying more than just afloat in previous downturns, and how you can too. All chapters are fascinating, but if the Oilholic was asked to pick his favourite passages, one would say Chapters Two (What does your personal recession look like?), Five (Dig In) and Seven (Run) would be among the most riveting ones.

This book is not some run-of-the-mill self-help guide. Rather parts of it might well jolt you into action. But perhaps that’s the jolt you need in life to be recession proof and the lessons Schenker learnt from challenges in his own life that form part of the subject matter strike a chord.

In the spirit of full disclosure, the Oilholic has known Schenker in a professional capacity for over ten years, since his days at Wachovia and one’s own at a CNBC Europe production team; and can personally testify that he never sits on the fence in any deliberation of any sort whether we’re discussing central banks, forex or OPEC's oil production quota.

His knack for plain-speaking is reflected in the narrative of the title. But Schenker’s book appeals to this blogger not because he’s an old friend, but because his work makes one sit up and take notice of things we often subconsciously ignore whether it comes to career or investment choices or for that matter which industry conference to attend!

The Oilholic is happy to recommend this title to the young and old alike, those starting out in professional life to those looking forward to retirement. Recession Proof, for this blogger at least, transcends a typical readership profile.

This book is not only about financial survival, it’s not only about career security, not just about investment management; rather it’s about all of the above, along with the right dosage of prudence and practical advice from an old industry pro sprinkled in for good measure. Everyone could do with that! 

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© Gaurav Sharma 2016. Photo: Front Cover - Recession-Proof: How to Survive and Thrive in an Economic Downturn By Jason Schenker © Lioncrest Publishing 2016