assessing the financial implications of the oil price collapse petrie.pdf · saudi arabia’s goals...

Assessing the Financial

Implications of the Oil Price

Collapse

Las Vegas, NV February 18, 2016

Thomas A. Petrie, CFA Petrie Partners, Chairman

Topics

14

Introduction

Current Macro Petroleum Landscape

Near-Term Petroleum Price Outlook

Longer-Term Petroleum Price Outlook

Implications for Petroleum Sector Participants

Trends in Energy Restructuring / Reorganizations

Concluding Observations:

“Following Oil” – Key Lessons Learned

86

88

90

92

94

96

98

2011 2012 2013 2014 2015 2016 2017

Global Supply

Global Demand

Oil Supply Overhang In Perspective

15


Source: EIA.

Glo

ba

l O

il D

em

an

d / S

up

ply

(M

MB

op

d)

Historical Projected

Supply is

Greater than

Demand

Demand is

Greater than

Supply

0

2,000

4,000

6,000

8,000

10,000

12,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

U.S

. O

il P

rod

uc

tio

n (

MB

op

d)

Historical and Projected U.S. Crude Oil Production

16


Historical Projected

2015:

9.3 MMBopd

Source: EIA.

Top Three World Oil Producers

17


4.0

6.0

8.0

10.0

12.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Na

tio

na

l P

rod

ucti

on

(M

MB

op

d)

Source: EIA. Russia production includes crude oil and other liquids.

Russia

Saudi

Arabia

U.S.A

U.S. Oil Production By Type In New Policies Scenario

18


Light Tight Oil

Other Unconventional Oil

NGLS

Crude Oil:

Fields yet-to-be found

Field yet-to-be developed

Currently producing

MB

op

d

12

1980

10

8

6

4

0

2

1990 2000 2010 2020 2030 2035

Note: The World Energy Model supply model starts producing yet-to-find oil after it has put all yet-to-

develop fields into production. In reality, some yet-to-find fields would start production earlier than

shown in the figure. Source: IEA, World Energy Outlook 2012.

Peak Concerns re:

Peak Oil!

?

88

90

92

94

96

98

$20

$40

$60

$80

$100

$120

2013 2014 2015 2016

Wo

rld O

il Su

pp

ly (M

MB

op

d)

WT

I O

il P

rice

($ /

Bb

l)

Increase In Supply vs. Price Decrease (WTI)

19


Source: EIA, Thomson Reuters.

Impact to E&P Sector

Total Sector Equity Values ($Bn)

20


Total Sector Debt as of September 30, 2015 ($Bn) (1)

$1,660

$1,297

$1,000

$1,150

$1,300

$1,450

$1,600

$1,750

June 30, 2015 Current

$527

$402

$300

$350

$400

$450

$500

$550

Book Value Market Value

Note: Market data per FactSet and Bloomberg as of February 12, 2016. Includes 86 E&P companies ranging in enterprise value from $15 MM to $375 Bn.

(1) Pro forma for recently announced transactions.

Commodity Price Trends

21


“Here Comes $20 Oil” Barron’s February 8, 2016

Perversely positive

“Lower for Longer” transforms to “Lower for Shorter”

Recovery to $45 – low $50’s oil is likely

But timing of recovery remains a risk

New Drivers to Reconcile Today’s Surplus

22


Item Value

Current Surplus 1.5 – 2.0 MMBopd

Declining Mature Global Production (3.7) – (4.7) MMBopd

Potential Expansion of Iranian Production 0.3 – 0.7 MMBopd

New Deepwater and Other Projects 1.0 – 1.5 MMBopd

Arithmetic Result (0.9) – (0.5) MMBopd

Many Reasons to Expect The Unexpected

23


China chills German economy (et al)

Venezuela assembly head pulls no punches (nor does Maduro opposition) *

Russia disrupts (Baltics, Ukraine, Syria, IPO’s, etc.) *

Saudi Aramco actually launches its IPO (upstream? downstream? petrochemicals?) *

Rapprochement between Iran and Saudi Arabia in 2016 (subject to five very unlikely conditions) *

WSJ Oil poker: “Why Saudi Arabia won’t fold” (yet?)

Iran’s influence over Iraq escalates significantly *

The possible positives would likely translate into another self-defeating “V-Shape” recovery

Implications of 2014 and 2015 OPEC Meetings

24


Saudi Arabia’s goals for the 2014 Thanksgiving surprise have been largely achieved

Recovery involves lead time issues

North American unconventional supply remains a likely survivor

Overstaying today’s market conditions is expensive for all of OPEC

Geopolitical risks are rising

Positioning for a “New Normal” is critical

U.S. Positioning for Oil Exports

25


Bakken

Eagle

Ford

Permian

DJ

Basin

Cushing,

OK

Puget Sound, WA

San Francisco,

CA

Eastern Canada

Houston,

TX

Los Angeles, CA

Elimination of the ban on U.S. oil exports is ultimately a price-capping development

Europe

Asia via

expanded

Panama Canal

26


The “Arab Spring” Has Morphed Into “Winter”

Algeria Libya

Egypt

Sudan

Saudi

Arabia

Iran Iraq

Tunisia

UAE

Western Sahara

Mauritania Mali

Niger

Chad

Kuwait

A virtual Cold War condition now exists between Saudi Arabia and Iran

Qatar

Two Takes on Oil Break-Evens

27


$39

$49

$32

$7

$46

$13

$65

$61

$0

$30

$60

$90

$120

USA Canada China Saudi Arabia Russia Iraq

Pri

ce

($ /

Bb

l)

Brent 12-Month Strip:

$37.23

Source: Citigroup Global Commodities Research. Prices per Bloomberg

Two Takes on Oil Break-Evens

28


$39

$49

$32

$7

$46

$13

$65

$61

$0

$30

$60

$90

$120

USA Canada China Saudi Arabia Russia Iraq

Pri

ce

($ /

Bb

l)

Brent 12-Month Strip:

$37.23

Source: Citigroup Global Commodities Research. Prices per Bloomberg

$105

$114

$89

Overlapping Energy Power Triangles

29


Russia

China

India

Iran

Saudi

Arabia

Historical view:

To US and West

?

Turkey

New view

to east

Conclusion: Like 2015, 2016 is proving to be another year of living dangerously

Key Country Policies / Strategies and Issues

30


Country Policy / Strategy Issues

China Transition from export-driven to greater consumer-driven

economy

One party rule vs. adequate

economic growth?

Russia Reasserting broad regional hegemony Sanctions are limiting oil and gas

capex reinvestment

Iran Awkwardly seeking a return to global respectability Questionable supporter of OPEC

Saudi (et al) Coping with multiple serious security challenges in an

alien environment

Saudi Aramco production

capabilities?

Europe Struggling with adverse demographics and ineffective

economic policy

Very limited economic growth

immigration burdens

United States Attempting to redefine more tightly its superpower status Election outcome, multi-region

security needs

In Sum: Geopolitical realignments are still evolving

Prevailing and Evolving Trends

31


Medium and Small Capitalization Producers

Surviving until the “New Normal” price range emerges is critical

Focus on specific regional and technical competitive advantage is likely determinant of success

Balance sheet challenges a priority

Creative mitigation of excessive leverage has become a compellingly attractive option

Large Capitalization Independents

Growth by acquisition and subsequent execution of drilling opportunities likely to prevail

Merger consolidation is likely post emergence of a “New Normal” price range

Success likely to require effective strategies to achieve economies of scale both in upstream and midstream activities

Major International Companies

Dividend payments are stressed at today’s oil price

That will remain so even with recovery to a ~$50 per barrel price range

High selectivity in sanctioning of deepwater and other frontier projects will prevail

Efforts to acquire large cap independents are probable

World Events & Oil – Nominal Pricing (1971 – 2016 YTD)


$0

$20

$40

$60

$80

$100

$120

$140

$160

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Iranian

Revolution

Shah

deposed

Saudis abandon

“swing producer” role;

oil prices collapse

Iraq invades Kuwait

Prices rise sharply

on OPEC cutbacks,

increased demand

Prices spike on Iraq war, rapid demand

increases, constrained OPEC capacity,

low inventories, etc.

Fear of global

economic meltdown

Back from

the abyss

Fiscal Cliff

fallout concerns

Iranian oil in production

precipitates the decline Gulf War ends

1973 Arab Oil Embargo

OPEC agrees

to quotas

Syrian

civil war

escalates

ISIS on rise

Iran-Iraq War

begins;

oil prices peak

Russia challenges

Ukraine

Saudis

decline to

play a “swing

producer”

role again

Prices fall sharply

on 9/11 attacks,

economy weakness

Saudis

considering

partial sale

of Saudi

Aramco?

197

1

197

6

198

1

198

6

199

1

199

6

200

1

200

6

201

1

201

6

$0

$20

$40

$60

$80

$100

$120

$140

$160

Source: EIA.

32

The Financial Impact of “Levering Up” In 2014

33


Late 2014 – Mid 2015 characterized by massive new equity and debt financing in the North American E&P sector

By mid 2015 markets were no longer accommodating to new financings

Selective debt equity swaps and fully drawn lines of bank credit have recently been utilized where possible

Sale of non-strategic assets to pay down debt is very challenging in the current oil and gas price environment

Distressed bond prices for E&P issuers can present a debt remediation opportunity

“Following Oil” – Key Lessons Learned

34

Concluding Observations

Markets continuously endeavor to work, but in their own time and at their own pace

Flawed economic and policy incentives ultimately cause or exacerbate supply shortfalls (or sometimes even create undesirable surpluses)

Black swan events entail especially noteworthy risks

It is often darkest just before the dawn

Powerful regenerative economic forces result from the application of well-incentivized capital focused on high-priority societal problems or needs

Periodic consolidation and reorganization (via mergers and sales) are integral to the evolving natural order of the petroleum-sector economy

Shifting global macro-economic drivers can overwhelm even a well-executed plan and thus necessitate midcourse adjustments in strategy for both corporate players and national entities

Old geopolitical grudges tend to reemerge, often at inopportune times and with adverse consequences (Ukraine, Syria, South China Sea, China/Japan)

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