Despite the near record increase in U.S. oil inventories last week – an increase of 13.8 million barrels – oil prices traded up on February 8 and 9 as traders pinned their hopes on a surprise drawdown in gasoline stocks, which provided some evidence of stronger-than-expected demand.
The abnormal crude stock increase took inventories close to 80-year record levels at 508 million barrels, and is another bit of damming evidence that should worry oil bulls. But the oil markets were not deterred. In fact, that has been a defining characteristic of the market in recent weeks – optimism even in the face of some pretty worrying signals about the trajectory of the market “adjustment” process.
More signs of optimism abound. Wall Street is pouring the most money into oil and gas companies in the U.S. since at least 2000, according to Bloomberg. In January alone, drillers and oilfield service companies raised $6.64 billion in 13 different equity offerings. "The mood is absolutely different," Trey Stolz, an analyst at the investment banking firm Coker & Palmer Inc., told Bloomberg. "Go back to a year ago and the knife was still falling. But today, it feels much, much better."
Moreover, the money raised for these U.S. companies represented more than two-thirds of the total $9.41 billion in new energy equity issued across the globe in January. Big Finance is ready to pour money back into the oil and gas sector and they are doing it mostly in the U.S.
The industry should see more activity this year as companies rush to conclude deals ahead of the rebound. A new report from Moody’s Investors Service predicts that M&A activity will rise substantially in 2017. “E&P acquisitions and divestitures dropped off when commodity prices collapsed in late 2014, but have significantly ticked up since mid-2016,” the Moody’s report says.
A lot of the action, unsurprisingly, is occurring in the Permian Basin. Austin-based Parsley Energy just announced its decision to spend another $2.8 billion on Permian acquisitions. The additional 71,000 net acres will give it one of the largest holdings in the Permian for an independent company. “It’s really been remarkable what Parsley’s been able to do,” Jackson Sandeen, Wood Mackenzie’s chief Permian Basin analyst, told the Houston Chronicle. “The company’s been on a tear.” Parsley has spent more money in the Permian this year than any other company besides ExxonMobil, which spent more than $6 billion in January to double its holdings in the Permian.
Wood Mackenzie says that 2017 will be even larger than 2016 in terms of the value of deals in the Permian. Last year, the industry spent $24 billion in mergers and acquisitions, a colossal sum that turned the basin into the hottest play in the country. Land prices skyrocketed as capital flowed into West Texas. But Wood Mackenzie says that less than two months into the New Year, the industry has already spent half of that amount in the Permian.
Moody’s cautioned that the valuations of some of the deals in the Permian might have become too large. The high prices might fall back a bit as the bubble deflates. Nevertheless, the ratings agency sees more money pouring into E&Ps, pipeline companies, oilfield service companies and refining. “As oil and natural gas prices stabilize at higher levels, increasing confidence in industry prospects will spur further acquisition activity in 2017,” Moody’s wrote.
The boom in the Permian will now lead to a rash of deals in the midstream sector, as more pipelines are needed to carry the larger flows of oil. FuelFix reports that companies like Magellan Midstream Partners and Enterprise Products Partners are rushing to build new pipelines from West Texas to Houston and the Gulf Coast, allowing more Permian oil to be processed and refined or exported abroad.
In short, the sentiment in the oil patch continues to improve even as oil prices have faltered in the low-to mid-$50s per barrel. That has translated into a record net-long position from hedge funds and other money managers, an incredible build up in bullish bets on oil.
The flood of money back into the industry portends a strong rebound in 2017. It could also leave a lot of people and companies on the hook if oil prices fall back again.