Page 7 - NorthAmOil Week 10

NorthAmOil COMMENTARY NorthAmOil
its fields in Western Siberia. But in any case, the vast majority of Russian production will remain profitable.
On the other hand, Saudi Arabia may be hoping that $30-35 oil knocks out some rival production in the US, the world’s biggest oil producer.
US impact
US shale drillers are set to take a serious hit from the price collapse. Warnings have been sounded over a wave of bankruptcies that could be loom- ing, with companies that have already been trading at distressed levels identified as being the most at risk. These include Bakken-focused Whiting Petroleum and prolific shale gas driller Chesapeake Energy. Having high levels of debt is another cause for concern for both Whiting and Chesapeake, among others.
Larger companies, including super-ma- jors with shale operations, may be more shel- tered thanks to their diversified operations but small and medium-sized companies look set to struggle.
Some shale producers have already announced plans to scale back spending and drilling. Permian Basin-focused Diamondback Energy said it was immediately reducing activity from nine completion crews to six. The company is planning to drop two rigs in April and a third later in the second quarter of 2020. Diamond- backsaidinastatementthatitwouldalsoreduce its capital budget for the year, though it did not specify a number this week.
“Diamondback has never been about growth for growth’s sake, which we have publicly empha- sised consistently since 2015,” Diamondback’s CEO, Travis Stice, said. “Because the expected returns of our 2020 programme have decreased, we have decided to wait for higher commodity prices to return to growth.”
Another Permian producer, Parsley Energy, said it was revising its WTI price assumption for the remainder of this year from $50 per barrel to $30-35 per barrel. As a result of this, the com- pany is reducing its rig count from 15 to 12, and said more cutbacks in the pace of its activity were coming.
Parsley had previously expected to generate free cash flow of at least $200mn this year at a $50 WTI oil price, but said it would now target at least $85mn under its new price assumptions.
On March 10, Marathon Oil – which has operations across a number of regions – said it would immediately cut its capital expenditure
budget for 2020 by at least $500mn, to $1.9bn from $2.4bn previously. This would mark a 30% reduction on the company’s capex in 2019.
Other shale drillers are anticipated to follow suit in the coming days and weeks. GlobalData estimates that while some producers with par- ticularly attractive acreage can break even at prices of $25 per barrel, most require prices of at least $40 per barrel once their less attrac- tive acreage is factored in. Thus if OPEC+ do not agree on new production cuts after all, and WTI prices remain below $35 per barrel, shale producers could be hit harder than before. The industry has survived a previous price collapse, but there are concerns about how many more companies are under financial pressure this time around. GlobalData sounded a note of opti- mism, however.
“Indeed, from a micro perspective things are looking quite difficult and there will certainly be losing companies; however, from a macro per- spective, the US shale supply has proved that not only it rebalances as needed, but that the pro- ducers that remain tend to improve their game,” GlobalData said. “This is due to the dynamism of the unconventional sector in the US, where this type of external shock is spread over many play- ers that also include the many equipment and services companies. Operators tend to demand lower prices for services hired and this helps to mitigatethenegativeimpact.”
Nonetheless, an already challenging operat- ing environment has just become much worse for the shale industry. As with the previous price crash, a number of producers will not survive.
What next?
If Russia and Saudi Aramco make good on their threats to scale up production and $30-35 oil persists, producers across the world will find themselves unable to turn a profit. Fields will be shut down and billions of dollars of future pro- jects shelved.
Under normal conditions, low prices would encourage increased demand, helping the mar- ket to rebalance. But the upside is limited by the significant reductions in travel and industrial output as a result of COVID-19. Russia and Saudi Arabia may find their supply war is ulti- mately futile amid such lacklustre demand, only serving to drastically weaken their economies. The industry will be hoping that the pair come to the realisation that they are playing a zero-sum game with little reward.™
Some shale producers have already announced plans to scale back spending and drilling.
Warnings have been sounded over a wave of bankruptcies that could be looming among shale drillers.
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