$80 Oil + $4 NatGas + 1,300 Rigs Working
After the news of the past few weeks, it felt like we were getting really close to the day when investors and oil industry spouses might be ready to throw in the towel. Then EnerCom’s 14th west coast investor conference unearthed something in the shadow of the Transamerica Building.
By blending together a batch of oil and gas producers and energy technology companies, globally-known energy geopolitical and financial experts, and a smart audience of predominantly west coast buyside investors, an amazing thing happened. Optimism driven by statistical research and a room of innovative companies who have figured out how to prosper at lower price levels bubbled to the surface: some upside showed its face.
Gerdes Wakes Things Up
John Gerdes (KLR Group’s Head of Research) delivered a riveting analysis of capital intensity within the industry which has led his research team to the following conclusion regarding oil price decks: “The futures curve tells us absolutely nothing about the future.”
Gerdes says that based on his team’s analysis of capital intensity within the full industry, U.S. overall E&P break-even is about $60/barrel, which doesn’t sound great when oil is trading in the $30s. But, Gerdes woke things up when he said that based on his group’s research, “oil will be in $80ish territory in 2018 and we’ll have $4.00 natural gas in 2018.” Gerdes said that two to three years from now, U.S. rig count will be 1,300 rigs.
His point was that things always change in this industry. “When I was an engineer, shales were capped off. Today we drill horizontally through them and stimulate them.”
Gerdes predicts approximately 4.5 BCF/day of U.S. LNG exports by 2020.
Every Single U.S. E&P will Issue Equity
What form of capital will drive the rig count back to 1,300 from today’s 500? “Every single U.S. E&P will issue equity,” he said. “Cash flow will be a part of it, and debt cannot be a part of it.”
Gerdes reiterated that in 2017 we’ll return to a more normal inventory base and that we’ll have $60+ oil in 2017 and $80+ oil in 2018.
Global Oil Market: Road Map to Recovery
In one of Gerdes’ presentation slides, entitled “Global Oil Market Roadmap to Recovery,” he lays out the details as follows:
Global Oil Market Roadmap to Recovery
- OPEC Supply
– Saudi production stabilizes at 10.3-10.4 Mmbpd
– Iran increases to ~3.5 Mmbpd by early ’17, reaches ~4 Mmbpd by ’20
– Iraq output stabilizes at ~4.4 Mmbpd in ’16/’17, exits decade at ~5 Mmbpd
- Non-OPEC Supply
– U.S. liquids supply should erode ~2 Mmbpd from 2Q/15 through 3Q/17 given ~80% reduction in peak-to-trough oil-directed drilling activity
– Russian liquids production stabilizes at ~11 Mmbpd
- Global Demand
– Global oil demand growth in ’16/’17 approximates ~1.2 Mmbpd
– Assuming ~3.6% GDP growth long-term, oil demand growth moderates to
~0.9 Mmbpd by ’20 with a ±5% per annum decline in oil demand intensity
- Market Imbalances
– Global oil market up to 1 Mmbpd oversupplied in ’16, rebalances in ’17, modestly undersupplied in ’18
After Gerdes’ prognosis for $80 oil and $4.00 natural gas in 2018, Core Laboratories (ticker: CLB; CoreLab.com) CEO David Demshur took the audience through his company’s 80 year history in just about 80 seconds–37 years of which he has been at Core Lab himself, serving as its CEO and president since 1994. Demshur pointed out that Core Lab’s business has evolved over the eight decades since it was founded in Dallas, Texas, in 1936.
Demshur said historically the business analyzed mainly core samples, but today “60% of our revenue comes from analyzing fluids.” Demshur said that many E&Ps who used to test fluids from their wells quarterly are now testing reservoir fluids every two weeks. He talked about the idea of re-fracing wells: “Longer laterals, more stages, more clusters, more profits.” Demshur said the Eagle Ford, Barnett and Haynesville were probably the best re-frac candidates. Demshur pointed out that Core Lab has returned $2 billion to its investors in the past decade.
Sanchez Energy (ticker: SN) Panhandle Oil & Gas (ticker: PHX), PetroQuest Energy (ticker: PQ), Resolute Energy (ticker: REN) and Tamarack Valley Energy (ticker: TVE) presented before lunch, as did Fredrik Andersen, first vice president DNB Bank ASA.
Andersen’s talk was entitled “Global Oil Markets and Hedging – Are Trends Your Friends?” Andersen spoke on a wide range of oil and gas related topics. “We think this is the beginning of some efforts from Saudi Arabia to try to raise prices.”
Andersen said that supply has slowly curtailed and “we’ve been in an improving trend for nine months.” Andersen said that it’s not Saudi vs. Shale, “it’s Saudi vs. whatever happens to be the marginal production.” He expects demand to grow 1 MMBOPD through 2020. Andersen said he looks for a shortfall of supply in the amount of 3.6 MMBOPD and, “it needs to come from new shale.” Andersen said OPEC’s spare capacity is the lowest it’s been in recent years. He gave $65 oil as a 12-month view and reiterated John Gerdes’ earlier statement: “The forward curve is not a good predictor of the future.”
The EnerCom 2016 San Francisco conference presentations may be downloaded here. Archived conference presentation webcasts may be listened to here.
EDITOR’S NOTE: The afternoon presentations will be recapped in a future post.
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