| ALASKA SUPPORT INDUSTRY ALLIANCE: Here are more photos from the recent "Meet Alaska" Conference in Anchorage. |
We fully support Senator Murkowski's Alaska viewpoint on supporting the Keystone XL Pipeline as reflected in this week's Op-Ed piece in the Alaska Dispatch News. -dh
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Alaska Has A Powerful Fighter In Washington: Chair Murkowski! -dh Houston Chronicle, by Jennifer A. Dlouhy.
So Murkowski set out to tackle it methodically and deliberately, eschewing bombast and loud press conferences for closed-door meetings with administration officials and white papers that examined every facet of the trade restrictions. She even drafted a roadmap for administration officials to undo the ban.No policymaker had seriously questioned the wisdom of the ban since it was imposed after the 1973 OPEC oil embargo. It was trademark Murkowski: tackling a thorny legislative issue…. More…. |
When Republican Sen. Lisa Murkowski (NGP Photo) called for an end to the longstanding U.S. ban on crude exports last January, the Alaskan was entering uncharted territory.This morning, our friend James Halloran, Independent Energy 
Analyst (File Photo) gives us this overview of the immediate and mid-term future of oil and gas markets and a closely related world economy.
Remember, Dear Reader, that while we strive to be optimistic, we must be committed to reality; those who depend upon us deserve it.
The reality that Halloran sees in our immediate future gives strength to those who are right now trying to cut all lower priority costs from both government and private industry operations. It is like preparing for a storm during hurricane season in South Florida. Those who prepare run the risk of over preparation but those who under prepare run the risk of losing everything.
-dh
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James Halloran Commentary: {Night before last} we featured the possibility of imminent change in the royal leadership of Saudi Arabia. {Yesterday} it was reported that King Abdullah has died, and Prince Salman will succeed him. It is widely known (or believed, at least) that Prince Salman suffers from Alzheimer’s Disease. How the Allegiance Council, made up of royal family members deals with this situation, will be worth watching, as will the timing and process of finally moving the throne to the next generation. We refer you back to the analysis of this issue back to Allen Brooks’ piece reprinted in last nights’ note. As of this moment there is nothing better out there in the media.
Evercore ISI oil service analyst James West has an outlook for the energy operations in 2015. We agree with most of it, to the extent that it represents a decent outlook on the business. It is a long piece, but here are some of the highlights:
Key Themes For 2015. The major themes that we believe will unfold in 2015 are:
1) a rapid fall in U.S. activity levels and the bottoming of the rig count in 3Q or 4Q,
2) the slow collapse of the international markets with corruption scandals and geopolitical issues adding to the activity decline,
3) the emergence of the Middle East as the only real regional bright spot,
4) the offshore markets turning from an oversupplied rig market to a full blown cyclical downturn,
5) the disappearance of new offshore rig orders,
6) a pause in the rush to export gas from North America as economics get re-assessed,
7) the largest subsea equipment installation cycle in the industries' history,
8) an increase in opportunistic M&A and share buybacks, especially given cash balances,
9) more growth for IPM-style projects, and
10) the continued push towards more automation in the global oilfield.
North America Is a Cash Flow Game… And Cash Flow Is Collapsing
The E&P business in North America is primarily a cash flow-driven business, and while production of hydrocarbons will continue to rise this year (with the rate of growth likely slowing considerably by year-end), the substantial decline in oil prices will dramatically impact cash flow and thus capital expenditures. We now anticipate CAPEX to drop by 30% year-over-year with higher cost liquids plays such as the Bakken impacted the most. Natural gas plays will likely remain insulated given their relative economics. The capital markets (both high yield and equity) will likely be mostly closed for the exploration and production companies, and while these companies would prefer to "drill through" what we expect to be a relatively short-term oil price trough, the companies will quickly see their cash flow decline, the absence of funding precipitating spending cuts. Capital spending cuts announced so far by the industry have been significant. This will slow down production growth, and thus the self-correcting mechanism remains in place. We anticipate 4Q15 versus 4Q14 production growth to be minimal at best. The first drop in the rig count will be sharp and unfold primarily during the first quarter, with a second substantial drop in late 2Q as hedges begin to roll off. We anticipate that the rig count will bottom late in the third quarter. Pricing pressure will be exerted across all product lines―no one will be immune tothe sharp decline in activity that we envision.
U.S. Land Rig Count Forecast
Amid our expected 30% North American E&P reduction in CAPEX during 2015, we model a slightly more severe 35% decline in the U.S. land rig count as spending cuts affect drilling to a greater extent than completions and other services. We forecast a decline in the rig count from its 4Q14 peak of 1,864 to a trough level of 1,204 for a net decrease of ~660 rigs.
The steepest drop should come in 1Q15 in response to the sharp commodity price selloff, with a more gradual decline set for 2Q15 before establishing a trough late in 3Q15, followed by a potentially modest uptick in 4Q15.
Rigs in conventional plays rife with smaller, private operators drilling shallow wells are likely to suffer most as those producing the incremental barrel are most sensitive to sustained low oil prices and have limited access to fresh capital. Among the major unconventional plays, the Bakken is likely to be one of the hardest hit as Continental, the region’s most active E&P, is budgeting 2015 drilling capital for the region at $1.55 billion (down 40% from its prior revised budget of $2.6 billion) and lowering its rig count from 19 currently to 10 in 1Q15. Midcontinent areas such as the Woodford and Niobrara, and perhaps more importantly the Permian, should also languish as their high concentration of vertical rigs drop out of the market. Furthermore, several areas in the Permian such as the Wolfbone and Wolfberry exhibit some of the worst economics among all U.S. unconventional plays, with breakevens in the ~$75-80/Bbl range. Though we model a 25% trough-level rig reduction in the Eagle Ford, this area is a potential wildcard as economics are shaping up better there than in other basins, and operators are migrating to the sweet spot between liquids-rich and wet gas compositions.
One relative unconventional bright spot could be the Marcellus/Utica, as efficiency gains and increased stage counts per well contribute to low breakevens and attractive IRRs even with gas prices under $3.00/MMbtu.
Market, Not OPEC, To Sort Out Prices (For Now)
The reaction (or inaction) by OPEC so far to the dramatic decline in global oil prices is telling. The cartel is unwilling to stem the decline due to the driver: demand. If it were merely a supply issue the cartel would likely have reacted at the November 27th meeting with a modest cut but given the demand concerns that would only have served to push the demand issue further into the future. OPEC's willingness to allow short term pain is in the best long-term economic interests of the cartel. The pain may also lead to better cohesion and adherence to quotas in the future; again, a decision that is in the group's long-term interests. For now the cartel has left the market to decide the clearing price for the commodity.
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