On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

Houston, We have a natural gas price problem!

While oil E&P players here in Houston are optimistic, those in the shale and natural gas businesses have a bit of a worry - for the first time since January 2002, a front-month settlement for natural gas has closed below US$2 on the NYMEX overnight.

The execution in question was for a May delivery which settled at US$1.984 per million Btu, down 2.3% or 4.7 cents, and it has caused a stir down here since majority of players, including independents are involved in both sets of prospection activity.

The reason is simple – there’s just too much of the stuff around, especially in a North American context courtesy shale gas plays which have been resulting in an exponential rise in US production. A relatively mild winter stateside and an abundance of supply has already caused natural gas prices to plummet over 50% on an annualised basis.

Can they plummet further over the next two quarters? Possibly. Will they? Probably not; that’s because the trading community will also take stock of the new low. The price is low enough as it is, but is there an appetite for further bearish punts? Regrettably, the Oilholic has not encountered definitive reasons one way or another. In fact, an unscientific straw poll of five Houston based traders had three anticipating a further fall while two said a temporary bottom had been reached.

Without a shadow of doubt though, over the course of the year, companies with a higher proportion of their production equation leaning towards natural gas will be more at profit risk on a basis relative to their peers having a greater exposure to oil production. Expect a scaling back of budgets or a sale of assets in order to manage leverage ratios by such players.

Coupled with all this is an interesting and somewhat related note on US midstream companies put out by Moody’s on April 2, 2012 which notes that booming demand for new oil and natural gas liquids infrastructure trumps weak natural gas prices. The agency reckons that a robust environment for US midstream energy companies will continue through mid-2013 and possibly beyond and forecasts that EBITDA for the midstream sector will grow by more than 20% in 2012.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays. The agency names Energy Transfer Partners, Enterprise Production Partners, ONEOK Partners and Williams Partners among those best positioned for organic growth.

In addition, Moody's says that low interest rates and the sector's lower commodity price sensitivity have made the midstream sector very attractive to equity investors, while both high-yield and investment grade midstream companies are able to tap the open capital markets for funding to fuel growth.

Moving away from ‘gassy’ issues and onto the price of the crude stuff, WTI maintained its mildly bullish thrust trading over US$103 per barrel at one point in intraday trading on Thursday aided by a weaker US dollar while Brent was seen more or less holding steady at price levels above US$120 per barrel.

That’s all for the moment folks! The Oilholic leaves you with views (above) of the Christopher C. Kraft Mission Control Center building and its mission control room at NASA’s Johnson Space Center which yours truly took time out to visit this afternoon. While crude oil markets have “lift off”, the natural gas markets have a “problem.” Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Downtown Houston, Photo 2: Mission control room and exterior of the Christopher C. Kraft Mission Control Center building at NASA’s Johnson Space Center, Texas, USA © Gaurav Sharma 2012.

First thoughts from Texas & Macondo bistro

It’s good to be back in Houston, Texas to meet old friends and make yet newer ones – not all of whom have a ‘crude’ side. On this visit, following on from last year and almost two years on from BP’s spill at the Macondo oil well in the Gulf of Mexico and the Deepwater Horizon explosion, the Oilholic finds a lot of positivity around.

Over a chat at Macondo, the Latin Bistro off Travis Street (near intersection with Franklin), not the spill site, most commentators – be they from legal, advisory or financial circles – seem to suggest that the US economy has gradually turned a corner though doubts persist.

While that is price positive for oil futures, some believe Chinese and Indian consumption may not be as trumped up as is being projected in the mass media. That’s not to say the consumption of both burgeoning economies won’t have an impact, only the impact would be felt less as both face economic headwinds. If combined with a dip in crude oil consumption in OECD jurisdictions, the scenario could be price negative but may well be countered by ongoing geopolitical factors.

Brent is holding ground at US$120-plus while WTI is resisting US$100-plus and a comparable forward month futures price differential between both benchmarks is now over US$20 per barrel. Even the most die-hard market commentator is acknowledging (finally) that Brent is more reflective of global price pressures than WTI. From global crude pressures to local price pressures on the refined stuff, which is averaging in downtown Houston at US$3.90 a gallon, well below the San Francisco average of US$4.40 a gallon; still Houstonians remain an unhappy bunch when it comes to prices at the pump.

A few good souls were both lucky and happy as a gas station in Texas made an error and marked the price at under US$2.00 a gallon leading to long queues before the owners could correct the error. One chap told a local radio station that he’d filled his car, his partner car, his mother’s car and his mother-in-law’s car before the error was corrected! Moving on from lucky sons and mother-in-laws to trends for independent upstarts, this state has always encouraged independents right from the heydays of wildcatters. In fact there is a lot of positivity around on that front too, especially if a new report from Moody’s is to be factored in.

The ratings agency believes the risk profile has improved for many small exploration and production (E&P) companies focused on oil and natural gas liquids production (NGL), and companies with technological ability to exploit unconventional resource plays are expected to benefit from rapid production and reserve growth.

Stuart Miller, Vice President & Senior Analyst at Moody’s notes, "Because of recent technological advances, smaller E&P companies that have large positions in newly productive, unconventional resource plays are expected to show rapid reserve and production growth over the next few years.”

“In addition, companies that have a high percentage of their production comprised of oil or natural gas liquids are expected to benefit from increased cash flow and greater liquidity. We believe that smaller, speculative-grade companies are disproportionately, and positively, affected by these developments," he adds.

Technological advances have made it possible to economically access vast new resources that were previously locked in place. New horizontal drilling techniques and the development of multi-stage hydraulic fracturing have unlocked these reserves.

Players who have been successful in applying these new drilling and completion techniques have lowered their finding and development costs, improved their risked return on investment, and enjoyed significant reserve and production growth. Future drilling results and production levels can now be predicted with greater certainty over large acreage positions, due to the improved performance of wells drilled using this new technology, says Moody's.

Over the next few years, Moody’s expects many small E&P companies with a high proportion of oil and natural gas liquids in their production streams are expected to report improving operating cash flow levels, higher capital budgets, declining leverage metrics, and better liquidity.

According to a spokesperson, with their existing ratings in brackets, these are: Alta Mesa Holdings (B2), Antero Resources LLC (B2), Baytex Energy (B1), Berry Petroleum (B1), Chaparral Energy (B3), Clayton Williams Energy (B3), Concho Resources (Ba3), Carrizo Oil & Gas (B2), Energy XXI Gulf Coast (B3), Harvest Operations (Ba2), Hilcorp Energy I (Ba3), Laredo Petroleum (B3) MEG Energy (B1), Oasis Petroleum (B3), PDC Energy (B2), RAAM Global Energy (Caa1), Rosetta Resources (B2), SandRidge Energy (B2), Sheridan Production Partners (B2), Stone Energy (B3), Swift Energy (B2), Unit Corporation (B1), W&T Offshore (B3).

That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Macondo Latin Bistro, Houston, Texas, USA © Gaurav Sharma.

What prospective Albertan pipelines mean for BC

If a new permit application by TransCanada for the Keystone XL pipeline from Hardisty, Alberta to Port Arthur, Texas does not get approved after the US 2012 presidential elections, attention will shift towards expanding the pipeline network westwards within Canada. If the project does get approved, well attention would still shift towards expanding the pipeline network westwards within Canada.

The Oilholic’s conjecture is that policy debate within Canada is already factoring in a westward expansion of pipelines eyeing exports via the Pacific Coast to China, Japan, India and beyond, whether the Keystone XL pipeline extension gets built or not. When US President Barack Obama did not grant approval to the original Keystone XL pipeline application earlier this year, Canadian Prime Minister Stephen Harper expressed his ‘disappointment’, had a candid conversation with Obama at an Asia Pacific leaders summit and then got on a plane to China.

He has also been to India on a high level mission in recent memory. At the 20th World Petroleum Congress in Doha last year, Indian officials listened intently to what was coming out of the Canadian camp. Canadian Association of Petroleum Producers (CAPP) has already noted increasing interest from Korean and other Asian players as well when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Club it all together and a westward expansion is inevitable.

Central to a westward expansion is British Columbia (BC), the Canadian province neighbouring Alberta, which could become as important in terms of pipeline infrastructure as Alberta is in terms of the crude stuff itself. From the standpoint of a ‘crude’ analogy, the situation is a bit like South Sudan (which has all the resources) and Sudan (which has the infrastructure to bring the resource to market) with a good Canadian fortune of zero conflict or geopolitical flare-ups. Thankfully for Canada and the importers club, Albertans and British Columbians also get along a tad better than their Sudanese counterparts and what is Alberta’s gain could also be BC's gain.

Last year, over a meeting with the Oilholic in Calgary, Dave Collyer, President of CAPP, noted, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

At present, there are five major pipelines that are directly connected to the Albertan supply hubs at Edmonton and Hardisty – Enbridge Mainline, Enbridge Alberta Clipper, Kinder Morgan Trans Mountain, Kinder Morgan Express, and of course the original TransCanada Keystone pipeline.

Of these, the Trans Mountain system transports crude to delivery points in BC, including the Westridge dock for offshore exports, and to a pipeline that provides deliveries to refineries in the US state of Washington. It is the only pipeline route to markets off the West coast and is currently operating as a common carrier pipeline where shippers nominate for space on the pipeline without a contract. Since May 2010, the pipeline has been in steady apportionment.

Excess demand for this space is expected to continue until there is additional capacity available to transport crude oil to the west coast for export according to CAPP. The available pipeline capacity depends on the amount of heavy crude oil transported. (For example, in 2010, about 27% of the volumes shipped were heavy crude oil).

So four more have been proposed via BC (see map above) – namely Enbridge Northern Gateway (from Bruderheim, Alberta to Kitimat, BC, Capacity: 525,000 barrels per day), Kinder Morgan TMX2 (from Edmonton, Alberta to Kamloops, BC, Capacity: 80,000 bpd), Kinder Morgan TMX3 (from Kamloops, BC to Sumas, BC, Capacity: 240,000 to 300,000 bpd) and Kinder Morgan TMX Northern Leg (Rearguard/Edmonton, Alberta to Kitimat, BC, Capacity: 400,000 bpd).

Given that it’s green BC in question, there already are legal impediments as well as a major bid to address the concerns of the Native Indian First Nations communities according to the Oilholic’s local feedback here. Environmental due diligence should be and is being taken seriously on the West Coast. Then there is the spectre of a socialist NDP provincial government or a hung parliament at the next elections in BC which could hamper activity and investment.

Taking in to account all this, realistically speaking not much may start happening before 2015, but there is a growing belief within the province that happen it most likely will and the benefit to the provincial economy would manifold. To begin with jobs, direct construction related to the proposed pipelines and revenues spring to mind. Additionally, there is likely to be a decade long rise in service sector jobs in the province.

Then given that BC has a proven crown agency in Partnerships BC which since its inception has been building generally bankable infrastructure projects; an ancillary social infrastructure boom to cater to what would become a burgeoning Kitimat and Kamloops is also within the realm of possibility.

Over the last ten days the Oilholic has gathered the thoughts of legal professionals, financial advisers, provincial civil servants and last but certainly not the least the average British Columbian you’d run into in a bar or a Starbucks. The overriding emotion was one of positivity though everyone acknowledges the impediments.

Furthermore, many think the pipelines would assist in diversifying BC's economy which is largely reliant on tourism and timber to include yet another key sector without necessarily compromising its green credentials and a record of accommodating the First Nations Native Indian population. That’s all from Canada folks! Yours truly is off to Houston, Texas. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Map: Proposed (in dotted lines) and existing pipelines to the West Coast of Canada © CAPP 2011.

Tankers in English Bay & Canada's Confidence

The Oilholic headed to downtown Vancouver from the suburbs this afternoon, up on Burrard Street, turning right on Davie Street, down Jervis Street straight through to Sunset Beach in order to get a look in at the English Bay which is quite a sight. Standing bang in the middle of the beach, to your left would be Granville Island, the Burrard Bridge overlooking it and Granville Bridge reaching out to it.

To your right would be two more beaches and Stanley Park on the Vancouver Downtown Peninsula and looking out to the horizon you’ll see pristine waters of the Bay littered with tankers (see image above on the left, click to enlarge). The view is a vindication of Western Canada’s growing crude credentials and its clout in the world of oil & gas exports. Yours truly and other onlookers would often spot the odd oil or LNG tanker on the horizon making its way to or from Vancouver Harbour and docking bays on the inlet towards Port Moody. However, this afternoon the Oilholic counted 12 tankers - the most yours truly has ever counted on five previous visits to the Bay!

There is a new found confidence in the Canadian energy business and a palpable shift in the balance of economic prowess from a manufacturing-led East Coast/Eastern dominated macroeconomic dynamic of the 1950s to a natural resources-led West Coast/Western dominated economy since 2005 or thereabouts. Furthermore, an ever mobile financial services sector with its hubs in Montreal and Toronto now looks increasingly Westwards. Law firms and advisory firms are increasing their presence in Western Canada by expanding practices and a network of partners in Calgary and Vancouver.

Calgary now has more corporate headquarters than Montreal. Of the top 20 most profitable Canadian companies by exchange filings in 2010, eight were natural resources companies with a Western Canadian slant (viz. Suncor, Barrick, Imperial Oil, PCS, Teck, CNR, Goldcorp and EnCana).

A recently spurned merger between natural resources and banking sector(s) dominated stock exchanges of London (LSE) and Toronto (TSX) would have been ideal. But much to the dismay of the Oilholic, the Canadians involved wanted to go it alone and whether you agree or not. In more ways than one LSE and TSX are rivals, especially when it comes to attracting mining companies.

Switching tack to big shots in Ottawa – well to begin with Prime Minister Stephen Harper is an Alberta man. Bank of Canada governor Mark Carney, Chief Justice Beverley McLachlin and the inimitable Rt. Hon. Joe Oliver – the country’s Natural Resources Minister and the most vocal among his G7 peers with an identical ministerial portfolio – are all ‘Western’ Canadians.

Having visited Canada on an annual basis since 2001, the Oilholic has seen the transformation of Canadian politics and the country’s economy first hand and it has been extraordinary in a positive sense. Harper’s “ocean of oil soaked sand” in Northern Alberta has more of the crude stuff than any other crude exporting country bar Saudi Arabia. Let’s not forget the Saudis’ reserves position has been verified by Aramco, Canada’s has been subjected to scrutiny by half world’s independent verifiers of different political leanings and persuasions.

The total value Canada’s natural resources according to various estimates at 2009 prices comes in at US$1.1 trillion to US$1.6 trillion, with the bituminous bit and shale alone accounting for at least 45% per cent of that depending on which financial analyst or economist you speak to.

“Canada’s biggest advantage as an oil exporter in the eyes of the world is that it’s no Saudi Arabia. Furthermore, in a business full of unsavoury characters, dealing with Canadians makes for a welcome change,” quips one patriotic analyst on condition of anonymity.

In the oil business there are no moral absolutes and no linear path to the Promised ‘Crude’ Land. Canada will have its fair share of challenges related to extracting, refining and marketing the oil. The will to do so is certainly there and so are the buyers. The Oilholic’s timber trade analogy has won him quite a few beers from Canadians and pragmatic macro analysts who loved it. There is an unassailable truth here – American dithering and often unjust punitive action against Canadian timber exports in the 1990s lead a Liberal party-governed Canada to look Eastwards to Japan and China.

Fast forward to 2011-2012 and history is repeating itself with President Obama’s dithering over Keystone XL (although TransCanada’s reputation in relation to leaks has not helped either). Akin to the 1990s, there are other buyers in town for the Canadian crude stuff, with India joining the tussle for Canadian attention along with Japan, South Korea and China.

When a Liberal-led Canadian federal government looked elsewhere in the 1990s to market and sell its dominant natural resource at the time, if the US government thinks a present-day Conservative government with a parliamentary majority and a forceful character like Stephen Harper at the helm won’t do likewise (and sooner) when it comes to oil, then they are kidding themselves more than anyone else.

The presence of Korean, Indian and Chinese NOCs can be felt alongside top 20 IOCs in Calgary. Not a single oil major worth its weight in crude oil has chosen to ignore the oil sands, just as onlookers at Sunset Beach can’t ignore tankers on the English Bay horizon. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil & LNG tankers on the English Bay horizon, British Columbia, Canada © Gaurav Sharma 2012.