This Week's Main News From The Oil Sector

For those who need a quick and easy recap of all the main events that took place in the oil and gas services sector, here it is courtesy of Credit Suisse's James Wicklung who present the various "things we've learned this week."

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You Will Get Nothing and Like It. According to Bloomberg, in the final gathering of OPEC officials prior to the June 2 meeting, no discussions of a production cut took place. Officials at the meeting concurred with OPEC's most recent research report that supply and demand will start to balance in the second half 2016.

Foot on the Gas. Sunday, Iranian Deputy Oil Minister Rokneddin Javadi noted that the country has no plans to slow oil production, saying, "Currently, Iran's crude oil exports, excluding gas condensates, have reached 2M bpd; Iran's crude oil export capacity will reach 2.2M barrels by the middle of summer." Prior to economic sanctions, Iran produced 4.5M bpd, which is down from peak production of ~7M bpd in the 1970s.

Time for a Change. Volatile oil and natural gas prices have accelerated planning by energy executives to change their business models; KPMG Global Energy Institute said in a May 24 release of annual survey results of US senior energy executives. Of more than 150 executives responding, 94% said commodity pricing coupled with the regulatory environment will require significant changes to their business models in 3-5 years. Executives said their top organizational priorities for the next 2 years are developing new growth strategies and implementing changes to their business models. When asked about mergers and acquisitions, 92% of respondents expect to be involved in a merger or acquisition in 2 years with 38% saying asset acquisitions are more likely than acquiring an entire company. Slightly more than half of oil and gas executives surveyed, about 51%, said they believe restructuring or bankruptcies primarily will drive acquisitions. Companies see the best way to remain competitive is by focusing on capital spending efficiency. “This new lower-for-longer commodity pricing environment has made it necessary for energy executives to devise new ways get access to capital,” said KPMG, adding that executives listed an unstable price environment as the leading factor hindering growth over the next year.

We Love Being Wrong. Baker Hughes announced it is consolidating its previous regional operations structure into one global organization and, in conjunction, is making leadership changes. Most importantly, there was no change to the CEO position. Previously, we thought a shake-up in leadership could cost the CEO his job; we love being wrong and wish Martin the best. Notable changes that were made include Belgacem Chariag, former Chief Integration Officer, who will serve as President, Global Operations. In addition, Art Soucy, Derek Mathieson and Richard Williams will serve as President, Products and Technology, Chief Commercial Officer and Senior Advisor to the company's Executive Leadership team, respectively. CEO Martin Craighead commented, "While we have more hard work ahead of us, the entire Baker Hughes team is committed to building on our strong foundation as a product innovator to deliver outstanding performance to our customers and significant value to our shareholders.” We emphasize the above to demonstrate BHI's focus on transitioning back to a product-based manufacturing company from a global service provider.

Grab the Sunscreen. SLCA announced it completed the purchase of a fully permitted, 327 acre parcel of land adjacent to its existing mine in Ottawa, Illinois. The land is expected to add 30M tons of proven reserves. In addition to oil and gas, the Ottawa facility serves multiple end  markets such as glass, building products and chemicals.

Big Money. A CVX lead consortium is set to invest up to $37B starting in 2017 as output from the giant onshore Tengiz oil field in Kazakhstan is ramped up. Other players include XOM (25% stake), Kazakhstan's state run oil company (20% stake) and Lukoil (5% stake). Many thought the majors couldn't completely walk away from deepwater, because finding enough places to spend their massive capital budgets did not exist onshore US. This large international onshore investment is another example of the Major's tendency to stay away from deepwater for the foreseeable future.

Straight to the Heart. According to a Reuters report, CVX's onshore activities in Nigeria's Niger Delta have been shut down after the facility's main electrical feed was blown up by a militant group called the Niger Delta Avengers. This is the same group that has targeted Shell's and CVX's platforms in the past few weeks. The attacks have pushed Nigeria's oil output near a 22-year low. Crude oil sales in the Niger Delta account for 70% of national income. As of publishing, CVX had yet to confirm the attack.

Borrowing from Within. Carbo Ceramics received $25M from two of the Company's Directors, William C. Morris ($20M) and Robert S. Rubin ($5M). Each note matures in April, 2019 and pays interest at 7%. The notes will be subordinate to CRR's revolving credit facility.

Not Again. Shell announced an additional 2,200 job cuts this week in conjunction with the BG acquisition. The company has now cut 12,500 jobs in 2015 and 2016 combined and anticipates at least 5,000 job cuts to be made this year.

Revolving Door. Petroleum Geo-Services amended its credit facility; total debt to adjusted EBITDA covenants were temporarily relaxed and a covenant allowing the company to add proceeds from an equity offering (if PGS decides to go this route) to adjusted EBITDA was added. Dividend restrictions remain in place.

Where Have All the Good Wells Gone? According to a study done by Rystad energy done this week, there are 3,900 DUCs across all U.S. shale basins, with more than 90% located in the major liquids plays (see Figure 1). In a recent unofficial industry survey we conducted, participants estimated there were 4,800 DUCs, which is 3,500 above normal (1,300 would be normal at current drilling levels). The number of DUCs and the impact they will have continues to be a hot topic of conversation in the industry. We anticipate that these wells will be the first to be completed when operators decide to put significant capital to work.

Framing the Damage. Wood MacKenzie released a study that detailed the size and scale of the industry downturn from a capital expenditure perspective. Since peak capex in 4Q14, $370B of planned capex has been cancelled. As we would expect, the deepest cuts have come in the US Lower 48 where capital investment has halved; the majority of production declines come from this region as well. While pre-FID greenfield costs have fallen an average of 10% (in capex/boe terms) from 2014 levels, WoodMac estimates that global costs need to fall at least 30-40% from 2014 levels for much of the current project pipeline to progress.

Despite All Odds. The North Yorkshire County Council (located in Northern England) approved a bid by Third Energy to frac a gas shale well. The well will be the first fracking operation in England since a ban was lifted in 2012. Despite protest from local residents, the county council voted 4 to 7 in favor of allowing Third Energy to proceed. Operations are expected to start by the end of the year. It should be noted that there  is a national policy supporting the development of shale gas which was an important consideration for the local officials.

Dating. Pemex, who has postponed investments in deepwater this year in the midst of $5B in budget cuts, is reportedly looking for partners to develop deepwater fields in the GoM; XOM, CVX, and TOT have been named as potential suitors. Mexico is set to conduct its first ever deepwater oil auction covering ten potentially lucrative blocks on December 5. 76% of Mexico's oil reserves are located in the deepwater.

The Struggle Is Real. Despite operating more drilling rigs than the rest of Africa combined, Algerian oil production is still not recovering after years of decline. Last year, Algeria drilled 149 wells and only made 22 minor oil discoveries, resulting in flat YoY crude output of 1.1M bpd. The decline in oil prices, combined with poor drilling results, has resulted in the nation's first current-account deficit in more than a decade. The IMF estimates that the breakeven oil price for Algerian crude is $87.60. For additional context, fellow African nation Nigeria produced 600,000 bpd more crude than Algeria in April while only running six rigs, compared to Algeria's 36. Furthermore, Iraq produced 4x the amount of crude running just over 40 rigs in April.

First Time in a Long Time. Tuesday, the Indian Oil Ministry announced it is putting nearly four dozen small oil and gas fields up for auction. 26 will be on land, 18 will be in shallow water and two fields will be in deepwater. Bids will be accepted from July 15 to October 31 of this year. This auction will be the first since 2010. The blocks that are up for auction were formerly held by state-owned E&Ps but were given back to the government due to high development costs. Recently, Indian Prime Minster Narendra Modi set a goal to cut the country's crude oil imports by 10% by 2022.

Calling for Change. The American Petroleum Institute (API) has called on the federal government to align its offshore leasing program to reflect the United States' role as a global energy leader. EVP Louis Finkel noted in a press briefing that ~87% of federal offshore areas remain off limits to oil and natural gas production and that leaving these areas off limits to exploration and production puts the U.S. at a serious global competitive disadvantage. Earlier this year the Department of the Interior removed the Atlantic from the 2017-2022 Outer Continental Shelf Oil and Gas Leasing Program.

Filling the Schedule. Petrobras is preparing to sell $10-20B in assets over the next two years. Specific assets, which could end up being Brazil's most ambitious sale in decades, have yet to be marketed to the public. Two Brazilian officials will be going on road a show to New York, London and other financial hubs in mid-July to market the assets.

King of the Hill. Russia was China's largest crude oil supplier for a second month this year, with shipment in April surpassing imports from Saudi Arabia and hitting a record high of 1.17M bpd. The record import figure is expected to subside in June as a rebound in oil prices is set to squeeze margins for refiners. In our view, it is clear that that market share war between Saudi Arabia and Russia has not abated.