As he usually does each quarter, Halliburton Company (NYSE:HAL) President Jeff Miller recently provided investors with his company's view on the oil market. Last quarter, he provided a clue on when the oil market might turn. This quarter his comments seemed to indicate that when the turn comes, it could lead to a significant change in America's role in the oil market. Here's a breakdown of his comments.
The demand response
Miller led off his comments by detailing the supply and demand picture. He noted that,
Over the past several months global demand expectations for 2015 have been consistently revised higher now calling for an increase of over 1 million barrels per day including recent upward revisions for both US and Europe.
One of the reasons the oil market went into a tailspin was because demand for oil was weaker than expected last year. This was due to a combination of persistently high oil prices along with slowing economic growth. Now that oil prices have been lower for several months that's leading to incremental demand for oil. It's an encouraging sign for the oil market as higher demand tends to lead to higher oil prices.
The supply surprise
Miller then turned his attention to the other side of the oil market: Supply. The other factor contributing to the oil price crash last year was the fact that supply growth was more robust than expected. This led to a glut of oil on the market and a deep downturn in oil and gas activity. Miller noted that in terms of supply,
[...} we're all watching US production levels very closely given the volume expansions that took place throughout 2013 and 2014. Recently monthly production estimates have been encouraging, however, showing significantly lower production growth and actually projecting oil production to be flat to down in the major basins.
Miller notes that once robust U.S. oil supplies are now showing a significant slowdown. This is due to the fact that oil companies are really pulling back on new wells. In fact, in Core Labs' earnings release it pointed out that just to keep production flat in the Bakken Shale of North Dakota oil producers need to drill 115 wells per month. However, in February only 42 new wells were completed, which is leading to a slump in production from the play.
In addition to a noticeable slowdown in U.S. production growth, international oil production from non-OPEC producers is also coming down. Miller calls this "an overlooked positive factor." In fact, he pointed out that by, "comparing the IEA forecast exit rate for 2015 against 2014, key non-OPEC contributors are expected to decline."
The combination of stronger than expected demand along with much slower than expected supply growth is expected to lead to a more balanced oil market in the future. That said, Miller did note that, it could be months or even quarters before we do finally reach equilibrium.
When balance is restored
Still, the very fact that balance is beginning to be restored to the oil market is a positive for energy companies, as well as their investors. In fact, Miller sees very positive signs for the North American oil market's future based on how it has reacted during the current downturn. Miller pointed out that,
[...] it is our view that North America will continue to be the most adaptable market in terms of addressing well economics through both efficiency models and technology uptake. One way to look at it is that the US unconventional business is now the lowest cost, fastest to market incremental barrel of oil available in the world today.
Said another way, the unconventional shale market has become the new swing producer in the oil market. This, in a sense, replaces Saudi Arabia as the swing producer as American producers have brought their costs down to such a level that they can ramp production up or down to very quickly respond to changing oil prices. It's really a potential game-changer for the oil market as it has broken OPEC's control over oil prices. That's why it has turned its focus on controlling its share of the oil market instead of swinging into action to cut production when oil prices collapse.
Halliburton's President sees the oil market improving to the point where it's very close to reaching equilibrium. However, as important as that is in the near-term for oil producer profits, what's even more important is that this downturn has demonstrated how quickly the U.S. oil market can respond to changes in oil prices. So, in the future when oil prices recover there will likely be a very dramatic uptick in U.S. oil production leading to a real gusher of profits for oil producers due to how much they've been able to cut their costs over the past year. It's a significant change that will only make America's oil production more important to the global market in the years ahead.
Are you looking for someone to join you in your misery? You sold for a loss, time to move on.
Seeing Saudi Arabia beat its head against the wall has been so fun that now Iraq’s petro-military apparatus has decided it, too, wishes to flood the world’s oil market with fresh supply and bring U.S. shale producers to their knees.
To put this in terms Iraqis may grasp: Please do. Texans will meet you in the street with yellow roses.
Short of giving away a city to Islamic State (as it did last weekend), Iraq could hardly do anything less in its own interest. It will cost Iraq money it doesn’t have — and can’t easily borrow. So the gambit to boost production by 800,000 barrels a day won’t last, and won’t matter. Ultimately, the drama will highlight why the price of oil is likely to stay near where it is for now, and drift lower over time.
Here’s why: U.S oil production is edging back into the money. With Brent crude LCON5, +4.47% around $65 a barrel and West Texas Intermediate CLN5, +4.28% at $60, world prices are high enough to make most U.S. production profitable, according to recent analyses by both Rystad Energy and Goldman Sachs.
And this may be conservative: Oil’s collapse last fall was fueled partly by data from North Dakota’s state government suggesting the average break-even point for Bakken shale is in the low $40s.
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The 2015 Corvette Z06 convertible could become a future collectible for car enthusiasts, WSJ’s Dan Neil says. Photo: Mike Finkelstein
That’s why the drop in U.S. rig counts has stalled. Last week’s Baker Hughes statistics showed only three fewer rigs than the week before, after a 60% one-year drop, with three net new land-based rigs. U.S. production is still higher than a year ago, and a game-changing 80% higher than in 2008. Moreover, the cost of shale production is still dropping.
For all the that the Saudis have “won” because Brent has gained about $10 a barrel since January, it’s still as much as $20 cheaper than it was in November 2014 when the Saudi plan became clear. The U.S. production drop hasn’t occurred, and investment is stabilizing. Some win.
At the same time, no OPEC producer has done much to undo their chief cost disadvantage — political instability and lack of individual freedom. It may sound abstract, but buying-off oppressed populations is expensive.
Since Arab states boosted social spending after the 2010 Arab Spring, the effective break-even on oil that props up regimes is extremely high. It costs only a few dollars a barrel to get the stuff out of the ground, but last year Goldman Sachs estimated Iran’s total break-even cost at $133 per barrel. Russia’s is $107, Iraq’s is $101. And so on.
OPEC’s endgame — push oil to $40, freeze U.S. supply, and wait for oil to hit $90 or $100 again — can’t work. There’s no place on that spectrum where OPEC covers its overhead — and it would have to cut capital spending, making OPEC less competitive and relevant, while making local politics even more volatile and unstable. Ask Iraq how smart that seems in Ramadi just now.
This is good news for oil stocks with U.S. exposure. A crude-price consensus would spark deal-making, as companies like Exxon Mobil XOM, -0.13% or Chevron CHV, -0.42% snap up rumored targets such as Anadarko Petroleum APC, -0.29% and Chesapeake Energy CHK, +0.21% And $60 crude still spurs U.S. producers to become more efficient, hastening the day when U.S. crude costs $50 or $55 on average to produce.
Crude around $60 is also good environmentally. Pump prices around the national average of $2.77 give people $50 to $100 of incentive a month to buy more-efficient cars — and there’s evidence that prices of many eco-friendly cars are falling. Yet speculative fossil-fuel ventures such as the offshore Alaskan drilling the Interior Department approved May 12 are likely to stay uneconomical.
A “goldilocks” price for oil is low enough to nurture consumer spending on everything else, and high enough for oil producers and shareholders to make money. It’s also low enough to make Nissan Motor NSANY, -0.95% 7201, +0.12% keep pushing down the cost of electric-powered Leafs, as Hyundai Motor 005380, +1.28% is doing with Sonata hybrids. Ideally, natural gas also stays cheap enough to sustain pressure for tax incentives for wind and solar electricity that, along with regulation, slash coal use.
Oil cheap enough to apply pressure on everyone to be more efficient and to force policymakers to keep thinking green, while high enough to make the effort worthwhile, is the goldilocks price. That’s close to where oil is now. Which has little to do with the Saudis, and nothing to do with Iraq.
Is your goal to make all of us that lost money in this stock feel worse? What is the point of your posts? I don't get it.
Continental Resources (NYSE:CLR) founder and CEO Harold Hamm knows a thing or two about the oil market. He has made himself more than $10 billion by finding and producing oil in the U.S. Because of his ability to turn oil into wealth, when Hamm speaks about the oil market, it is worth it for those also seeking oil-fueled riches to pay attention. Here is a summary of his latest thoughts on the oil market.
Harold Hamm started off his thoughts regarding the current state of the oil market on Continental Resources' first-quarter conference call:
We are living today in historic times as world markets are recalibrating and the pace of North American energy renaissance as demand expands to equal supply. Continental has been a leader in this renaissance. I'm pleased to tell you that we have adjusted to this new market condition and we are well-positioned for success in this environment.
Hamm calls the times we are living in "historic" for the world energy market. That's because for the first time in decades, the oil market is no longer controlled by the Middle East. Instead, that control is being ripped away by North American energy producers, with Hamm's Continental Resources leading the charge.
He would go on to note that his company is pushing down costs as it "adapted quickly and decisively to the new price environment"; it can now produce more oil for less money spent. Overall, the company is drilling farther, faster, cheaper, and more efficiently than ever before. It's a trend not seen just at Continental, but being furthered by most other U.S. independent oil companies.
Because this trend is real and gaining momentum, the industry is pushing for change, particularly for the lifting of the U.S. oil export ban.
The time is now
Hamm noted that:
Continental has been working hard with other industry leaders to lift the U.S. ban on crude oil exports. The current environment [of] world energy markets perfectly illustrate why this should happen, and I'm highly optimistic we'll get this done this year. Senators and Congressmen are becoming knowledgeable around this issue and the fact that the ban is a 1970s-era relic of the Nixon price control administration that directly contradicts our commitment to free-trade.
Hamm and many of his industry peers, including Ryan Lance, CEO of ConocoPhillips (NYSE:COP) and Scott Sheffield, CEO of Pioneer Natural Resources (NYSE:PXD), have been very vocal in their push to have the export ban lifted. In fact, both ConocoPhillips and Pioneer Natural Resources have already found ways to skirt around the ban as Conoco has exported some of its Alaskan oil while Pioneer is exporting a minimally refined ultra-light oil. Still, all three men want a complete end to the ban because it is hindering the growth of the oil boom.
Hamm then noted a key reason the ban is becoming a logistical issue in the U.S.:
It is becoming widely recognized that sufficient refinery capacity does not exist in America today to process American light sweet crude oil from shale plays such as the Bakken, and we, the producers, are subject to a steeply discounted value as a result. Success in getting the ban lifted will benefit the United States immensely in terms of energy development and security, jobs growth or trade balance, and consumer stability of gasoline prices in the future. The time has come for this change.
We can see the price disconnect he is referring to in the chart below:
WTI Crude Oil Spot Price Chart
WTI CRUDE OIL SPOT PRICE DATA BY YCHARTS.
What Hamm is suggesting is that by allowing U.S. oil companies to export oil, it would close the gap between the global oil benchmark, Brent, and the U.S. oil benchmark, WTI. That would give U.S. oil companies a bit more cash to drill more wells and produce more oil, therefore further loosening OPEC's grip and providing more stability to the oil market, and providing a boost to global energy security.
Hamm is such an outspoken critic of the export ban because the only real beneficiary OPEC, which has destabilized the oil market time and gain. That's why he recently went on CNBC to say that OPEC's decision to flood the market with oil will backfire because it will be the catalyst to open up the floodgates to U.S. oil exports.
Hamm pointed out that OPEC "used predatory pricing to cut the price of oil down to nothing where they think we can't make it, but I think they've almost guaranteed us an outlet to world markets." That's because U.S. oil companies have instead proved they can make it in a low oil price environment because of how rapidly costs have fallen. Now, U.S. oil producers are ready to pounce and become the leaders in the global oil market just as soon as they can export freely.
Harold Hamm doesn't see the dramatic drop in oil prices over the past year being a cause for concern, but instead it marks a historic shift. U.S. oil producers proved they can change on a dime and dramatically cut their costs. Now, they're poised to unleash their own flood of oil on the market as soon as the U.S. ends its archaic export ban. Clearly, Harold Hamm is quite optimistic about the future of the U.S. oil industry.
Linn Energy (NASDAQ: LINE) has been incredibly volatile in 2015. The company's units have been up more than 35% at various points in the year, but right now, units are up just under 3%. Here are three things Linn could do to push its unit price back to those heights and beyond.
1. Start using DrillCo
One of Linn Energy's strategies has been to seek out private capital to fund growth. So far this year, it has successfully netted $1.5 billion in private capital. One piece of that private capital is the company's $500 million DrillCo venture, which provides the company with capital to drill wells without spending money from its own balance sheet.
So far, Linn has yet to use any of this money as it is searching for the right opportunity to invest the capital. One opportunity it could pursue is to use DrillCo to drill wells on the company's remaining 6,600-acre position in the Midland Basin. When asked on the company's first-quarter conference call about using this acreage position for DrillCo, CFO Kolja Rockov said that while it was continuing trade dialog, the company also has "a number of different development opportunities now that we can pursue the value on that," with DrillCo being one option.
Putting DrillCo to work either drilling on its Midland Basin acreage, or at some other spot, could provide a boost for the unit price since this is no-cost growth for Linn Energy.
2. Make a deal using AcquisitionCo
Linn's other private capital funding vehicle is its AcquisitionCo venture, which provides it with up to $1 billion in equity capital for acquisition funding. It is a vehicle that, with leverage and Linn's contribution, provides the company with a war chest of upwards of $2.5 billion for acquisitions.
Using this vehicle to make a deal could drive Linn's unit price higher as it provides relatively low-cost growth with lots of upside. Rockov noted on the first-quarter conference call that the company plans to use AcquisitionCo to acquire assets that might not be a perfect fit for Linn Energy's low production decline business model. Instead, the company will use AcquisitionCo to acquire a company earlier in its life cycle, then as the decline rate of the acquired assets moderates, Linn can drop those down into its own portfolio, meaning built-in growth for the company.
3. Using its buying power to acquire a rival
The intention behind AcquisitionCo is to buy assets or companies that don't currently fit within a low-decline MLP business model, such as an asset based on horizontally drilled shale wells. That leaves all other acquisition opportunities open to Linn to buy for its own account. The company has said that its preference is to use equity to make acquisitions in this environment, and one really compelling opportunity would be to acquire smaller upstream MLPs in a unit-for-unit exchange. That would fit with recent trends as the upstream MLP sector has seen a lot of consolidation in recent months, with three notable deals over just the past few months.
One MLP that looks like a perfect fit for Linn is Legacy Reserves (NASDAQ: LGCY). The upstream MLP is already operating as many of the basins as Linn, as Legacy has core areas in the Rocky Mountains, Permian Basin, and the Mid-Continent. In addition to that, Legacy Reserves has a relatively strong balance sheet, which means an acquisition wouldn't negatively impact Linn's credit metrics.
Another reason Legacy Reserves looks like a compelling fit is because the company has a solid position in the Permian Basin, which Legacy has noted would be best developed in a DrillCo. In fact, the company said it has the potential to spend $500 on initial projects over the next few years, which just happens to be what Linn has available on its own DrillCo. Acquiring a company like Legacy Reserves would make a lot of sense for Linn Energy, as it could improve its balance sheet and its opportunity set, which could also boost the company's unit price.
Linn Energy's unit prices have been quite volatile over the past year. However, by using its private capital or making an acquisition, Linn Energy could excite investors, which would push the unit price higher.
Read more: http://www.investopedia.com/stock-analysis/061115/3-things-could-push-linn-energy-higher-line-lgcy.aspx#ixzz3crRpR3nM
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The better companies will adjust to the new norm. We will see who the winners and losers are eventually. For me, i'll take my chances with Linn. As i said before, i'm not selling for a loss.
Tell me, just how much have you lost with Line.
Some Oil Companies Have Already Gone Under
The initial drop in oil prices in the winter and spring of 2015 has already brought with it a string of oil-related bankruptcies. In March, Quicksilver Resources, a billion-dollar shale operation filed for Chapter 11 bankruptcy protection after missing a bond payment. Also that month, BPZ Resources shuttered its operations as well as Dune Energy, and they were subsequently followed by Sabine Energy, WBH Energy and American Eagle Energy. Not only do these bankruptcies hurt the shareholders in those companies, but they also ripple through to the financial sector who issued loans and credit to these companies, the land owners who leased their property to drillers, as well as those workers who have now become unemployed. (For more, see also: Falling Oil Prices Could Bankrupt These Countries.)
Oil Companies Next at Risk for Bankruptcy
The renewed bear market in oil is likely to take more casualties in the coming weeks and months. Investment bank Goldman Sachs Group Inc (GS) issued a report earlier this year ranking the relative financial strength of oil companies exposed to low oil prices. The findings are reproduced in the table below from their report:
Group 1 and 2 companies have strong balance sheets, in the sense that they have enough cash or liquidity on hand to service their debts and weather a prolonged period of low profitability. Groups 3 and 4 include companies with weak balance sheets who are at risk of going under. Group 3 companies are those who may be acquired at a bargain by larger oil companies as they begin to struggle, and are at less risk of outright bankruptcy. Group 4 companies, on the other hand, are at great risk.
Let's take a quick look at the stock performance of these companies most at risk since this report was issued in January:
1. Approach Resources (AREX) has seen its stock price tumble more than 33% year-to-date.
2. Exco Resources (XCO) shares are down 74%.
3. Goodrich Petroleum (GDP) is down over 80%.
4. Halcon Resources (HK) has lost 50% of its market capitalization.
5. Magnum Hunter's (MHR) stock price is down almost 70% since Jan. 1.
6. Midstates Petroleum (MPO) has lost 65% of its value.
7. Rex Energy (REXX) is down nearly 56%.
8. Sabine Oil & Gas has gone bankrupt.
9. SandRidge Energy (SD) trades more than 70% lower than at the beginning of the year.
10. Swift Energy (SFY) is down more than 80% year-to-date.
There is a high probability that these nine American oil companies left standing will be the next to fall.
The Bottom Line
Low oil prices have plagued petroleum companies now for half a year, and with the global economy on shaky ground, the demand for oil may stay lower than expected. As a result, there are likely to be more bankruptcies in the energy sector by those companies with weak balance sheets who are no longer able to profitably produce oil in today's market. At the same time, now might be a great opportunity to find oil companies who may weather this downturn and see their stock prices recover in the future. For those companies, now might be a unique opportunity to invest.
Read more: http://www.investopedia.com/articles/investing/072815/oil-companies-near-bankruptcy.asp#ixzz3hHuiVpS8
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What's your point? Do you think you're telling us something we don't imagine could happen? Anything could happen. So tell me what is your point?
Linn Energy LLC (NASDAQ: LINE ) and its financial holding entity LinnCo (NASDAQ: LNCO ) have taken it on the chin over the past year. Obviously, the primary culprit was the rout in the oil market. The price of crude oil fell from about $100 per barrel at its 2014 peak to roughly $45 per barrel at its 2015 low. As a upstream exploration and production company, Linn was hit extremely hard.
Things got even worse a couple weeks ago when Linn stock fell double-digits after the company announced a major secondary unit offering. Linn sold 16 million units at an average price of $11.79 per unit. This is well below where Linn was trading just a few months ago. In fact, Linn shares exchanged hands at $30 this time last year.
Still, Linn had good cause to conduct this offering now. Here's why Linn's transaction made sense, and why better days might lie ahead for the embattled oil and gas producer.
Getting some relief
Linn took on significant debt as a result of its $4.3 billion acquisition of Berry Petroleum, $1.8 billion of which was the assumption of Berry's debt. With oil and gas prices getting slammed and a debt-heavy capital structure, Linn needs some flexibility. Linn could use any relief on its existing Berry credit facility it can get, because it's essentially maxed out.
Linn's Berry credit facility has a borrowing base of $1.4 billion, but as of the end of last year, there was less than $1 million of available borrowing capacity. That's exactly what it's getting with its secondary offering. The transaction will raise approximately $181 million in net proceeds to repay debt under the company's existing credit facility, which was primarily incurred to repurchase Linn and Berry's senior notes.
On the surface, it seems questionable for Linn to offer units that yield 10% to retire less-costly debt. It doesn't appear to make sense to incur a near-term cash burn when the company needs as much cash as possible during the oil and gas downturn. But other considerations might be in play. For instance, reducing debt could improve Linn's position with creditors. Linn did have approximately $10.4 billion in debt at the end of last quarter after all.
Meanwhile, things appear to be improving
The unit offering aside, Linn's situation does seem to be improving. The company's oil and gas production grew 2% last quarter, even though it cut capital spending by a whopping 65%. This implies Linn's shifting focus toward higher-quality assets with lower rates of decline is working as management had hoped.. Linn also saved a significant amount of cash by slashing its distribution by 57%. Linn has taken an ax to its spending as a result of the oil crash, including its reductions in distributions and its capital budget. Fortunately, these spending reductions appear to put Linn on firmer footing. The company expects to fund its 2015 distributions and oil and gas capital spending entirely from internally generated cash flow.
In addition, Linn has strong hedging policies in place to help insulate it against further deterioration. Linn entered into additional oil swaps earlier this year, which mean the company is now hedged 80% of its 2015 oil production at an average price of $91 per barrel. Moreover, Linn is fully hedged on its natural gas production at an average price of $5.12 per MMBtu..
Separately, the price of oil has recovered significantly from last quarter. West Texas Intermediate is back to nearly $60 per barrel, meaning the current quarter's results could improve from the preceding three-month period.
The Foolish takeaway
The bottom line for investors is that while markets typically punish companies for selling new units, reducing debt is a good strategy for Linn Energy. Excessive debt can force a company into dire straits, which was a real concern for exploration and production companies when the price of oil collapsed. Selling new units is costly as well, but the company can always cut its distribution again if conditions deteriorate further. Meanwhile, Linn got some much-needed debt relief, as its current Berry credit facility is maxed out. And, if the oil market stabilizes, Linn's operations could continue to improve from here.
Houston-based Linn Energy LLC (Nasdaq: LINE) announced on July 6 that it has finalized partnerships for future developments and has sold assets in Texas.
According to a statement from the company, Linn Energy signed a definitive agreement to sell its remaining assets in Howard County, Texas, for $281 million to an undisclosed buyer.
The property, located northeast of Midland, Texas, in the Permian Basin, includes approximately 6,400 acres for horizontal drilling and 133 gross wells, the statement said.
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The sale became effective on May 1 and is expected to close in the third quarter. RBC Richardson Barr acted as financial adviser to Linn for this transaction.
In two other statements released on July 6, Linn announced that it has finalized alliances that were announced earlier this year after the company, like many in the energy industry, slashed its 2015 budget in half.
According to a statement, Linn signed a definitive agreement with Houston-based Quantum Energy Partners in which Quantum agreed to commit up to $1 billion of equity to fund acquisitions and development of oil and gas assets.
Linn will manage the assets in exchange for reimbursement of general and administrative expenses.
The company also announced that its agreement with GSO Capital Partners LP, the credit platform of New York-based Blackstone Group LP (NYSE: BX), to fund development projects has been finalized. GSO has agreed to commit $500 million over five years.
New York-based Jefferies LLC acted as financial adviser to Linn in both of these agreements. Los Angeles-based Latham & Watkins provided legal advice to Linn in the agreement with Quantum, while Houston-based Vinson & Elkins provided legal advice to Quantum.
Just keep talking to yourself. It doesn't seem anyone is listening. You are a very strange person.