Download looking forward – effects of $50/bbl oil

LOOKING
FORWARD –
EFFECTS OF
$50/BBL OIL
RISKS. REWARDS. CONSEQUENCES.
CRiTiCal THinkinG aT THe CRiTiCal TiMe™
Table of
Contents
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here we are today:
W
Unprecedented production
growth and price declines
5
I s this downturn different
from historic declines?
And will it last longer?
8
T he fallout of $50/bbl
10
The FTI Consulting view
12
Partner with FTI Consulting
FTI Consulting, LLP Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
Where we are today:
Historic production growth begets
precipitous drop in commodity
prices – creating challenges and
opportunities for industry.
Major technological advances in the
application of horizontal drilling and
hydraulic fracturing in the United States
have dramatically expanded U.S. oil and
gas production, transforming global
oil markets. By the end of 2014, U.S.
daily crude oil production from tight
formations such as shale had increased
230 percent from 2010 levels, and U.S.
crude oil production in total increased
by 67 percent.
A confluence of separate but related
factors– massive new supplies from the
United States; OPEC’s unwillingness
to reduce its output; and a slowing of
global oil demand (especially in OECD
countries) – has had profound impacts
on the global price of crude. In June
2014, WTI crude peaked at $115/bbl.
By January 2015, it had dropped below
$46/bbl.
Historical Oil (WTI) Prices
$160
Oil ($/bbl)
$140
$120
$100
$80
$60
$40
$20
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$0
Source - U.S. Energy Information Administration
Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
FTI Consulting, LLP
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FTI Consulting, LLP Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
wHY tHE BottoM
FELL oUt oF tHE
MarkEt
additionally, during this period, there were:
despite this dramatic growth in u.s.
crude production, wTi prices remained
between $80/bbl and $110/bbl from
october of 2010 until late november
2014. why didn’t the market respond
with gradual declines in price as
supplies steadily grew, and what does
this tell us about the future?
• Geopolitical upheaval in the Middle
until recently, the massive new supplies
of u.s. crude being introduced into the
market had surprisingly little effect
on global oil prices. why? because, as
these new supplies were coming online,
geopolitical conflicts were flaring up in
key oil-producing regions around the
world. There was a civil war in libya.
iraq was facing threats from isis. The
united states and europe imposed
new sanctions on iran, significantly
curtailing its oil exports. all that had
the effect of taking more than 3 million
barrels per day off the global market –
or, roughly the same amount that was
being added anew by the united states.
• Major supply disruptions in africa and
the Middle east significantly reduced
their contributions to global supply.
east, Crimea and ukraine kept upward
pressure on global crude oil prices.
• Market participants expected oPeC
to function as a cartel and stabilize
global crude oil prices.
tHE
inFLEction
Point
in the last quarter of 2014:
• U.S. production continued to
increase through the end of 2014.
• Non-OPEC production also
continued to increase through the
end of 2014.
• The Saudi Arabia “wild card”.
oil prices were buoyed by the
expectation that the saudis would cut
production in order to stabilize prices.
when saudi arabia announced on
Thanksgiving 2014 that it would not
cut production and would not revisit
the issue for six months, the crude oil
sell-off began in earnest.
Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
FTI Consulting, LLP
3
some experts
believe that NYMEX
prices will recover
in early 2015
4
FTI Consulting, LLP Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
Is this downturn different
from historic declines?
And will it last longer?
There is disagreement among experts about
what the future will bring.
Some experts believe that NYMEX prices
will recover in early 2015:
•In late January, Reuters reported
that prices rebounded somewhat on
traders’ hopes that “prices will recover
as energy companies cut production
investment, including U.S. shale
production, to alleviate a glut that
has wiped out more than half crude’s
value since June.”
•Investor’s Business Daily has
reported that new permits for oil
wells in the U.S. declined by nearly
40 percent from October 2014 to
November 2014, with permits in the
Permian Basin, Eagle Ford and Bakken
down by 38 percent, 28 percent and
29 percent, respectively.
•Prices may rise in the short run due
to different geopolitical scenarios
unfolding, such as renewed
disruptions in Libya, a decision to
halt the Kurdistan project, or an
announcement from the Saudis that
they have decided to reverse course
and cut production.
•Prices may rise as E&P and service
companies significantly cut their
capital expenditures for exploration
and production and reduce the size of
their labor force.
Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
FTI Consulting, LLP
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Other experts believe that prices will
stay low for some time.
These experts focus on the current
environment, which is driven in no small
part by changing supply and demand
conditions. As production has increased,
the amount of proved reserves in the
U.S. has increased by more than 50
percent in the last half decade. And
against this backdrop, demand for crude
oil continues to slide in key markets,
decreasing by nearly 300,000bbl/day
in OECD countries between 2013 and
2014, with numbers expected to remain
essentially flat for 2015 and 2016.
North
American Rig Count
1,600
1,400
1,200
1,000
DIR.
800
HORZ.
VERT.
600
400
200
0
Source - Baker Hughes
In addition, these experts believe that a
significant share of production comes
from low-cost wells and that breakeven costs are likely to decline further
due to technology improvements, the
sunk nature of many costs (including
commitments for rail and pipeline
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transportation), and price reductions
for land rigs, pressure pumping, etc.
Lower break-even costs could have the
effect of slowing declines in production
from North America, prolonging the low
price environment.
FTI Consulting, LLP Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
other experts
believe that prices
will stay low for
some time
Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
FTI Consulting, LLP
7
The fallout of $50/bbl
e&P firms will face strong headwinds in 2015, but the
“dispatchability” of shale oil operations – the ability
to ramp production up or down quickly in response
to market conditions – could lessen the impact on
nimble operators.
as reported by the FinancialTimes,
bernstein Research found that from
2000 until very recently, oil companies
consistently experienced increases
in oil prices after final investment
decisions, i.e., projects approved in
the 2004 to 2011 time period saw an
average rise of $18/bbl in the price of
crude by the time these investments
began producing. at the same time,
much of this time period coincided with
a period of very low borrowing costs.
This combination created a sustained
surge in oil and gas investment, much of
which was funded with debt rather than
8
equity. The FinancialTimes found that
oil and gas producers and refiners with
debt both at the end of the 2008 crash
and at the end of 2014 had, in aggregate,
twice the amount of net debt at the end
of 2014, and net debt-to-ebiTda ratios
that had increased from 0.7 to 1.8.
as the FinancialPost reported in
mid-december 2014, Goldman sachs
reviewed the Top 400 global oil and gas
projects, ranked by size, and concluded
that no more than a third would breakeven at $70/bbl oil. at the same time,
however, many of the highest cost
projects (e.g., kazakhstan’s kashagan
FTI Consulting, LLP Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
field) exhibit complex ownership
structures and government involvement,
which makes simply stopping the project
much more difficult, particularly if the
producing country is in need of revenue.
shale oil production – the major factor
driving the downturn in oil prices – is
very easy to dial up or down, depending
on market circumstances. spudding
a shale well can take just a few weeks;
ramping down an operation can be
done in a matter of days. and many
companies have announced plans in
2015 to continue drilling these wells
without actually “completing” (i.e.,
fracturing) them – conserving funds
in the short term, while positioning
themselves to jump back into the
market quickly should the underlying
price environment improve.
Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
FTI Consulting, LLP
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The FTI Consulting view
against this backdrop, who will gain and who
will struggle if oil prices remain in the $45/bbl
and $65/bbl range for a sustained period of time?
simply put, consumers of energy,
particularly petroleum, will gain.
Consumers of energy will be better
positioned. This group includes
petrochemical producers, energyintensive manufacturers (especially those
that use petroleum or products whose
prices are correlated with petroleum),
other industrial manufacturing
operations, transportation, agriculture
and general consumers.
for example, eia projects that u.s.
drivers will each spend about $550 less
on gasoline in 2015 than they did in 2014,
assuming prices stay low. Petrochemical
companies that use oil and natural gas
as feedstocks will gain. with one of their
largest operating costs significantly
reduced, they will be more profitable and
more competitive on a global scale.
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Most producers and service
companies will continue to
struggle. This group includes highly
leveraged e&P companies that
are receiving far less in revenue for
every unit they produce. They face
difficult options – e.g., restructuring/
streamlining operations, selling off
assets, renegotiating with lenders and
leaseholders, or going into bankruptcy.
for example:
•Companies active in the north
sea substantially increased
capital spending over the past five
years. because of ever-worsening
production decline curves, they may
struggle to survive, as will regional and
municipal governments dependent
on oil revenues, such as the city of
aberdeen, the center of the north sea
oil services industry.
FTI Consulting, LLP Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
•There will be rapid consolidation in
the u.s. e&P industry, and service
companies are already being
particularly hard-hit.
•alternative and emerging fuels –
such as biofuels – may become
uncompetitive. To the extent there is
carry over to natural gas prices, wind
and solar companies will also see
erosion of their market.
•Coal companies and related
businesses may also suffer, especially
if natural gas prices remain low.
costs and capital expenditures in
advance of the drop in crude oil prices.
as a result, their balance sheets are
strong and strengthening
in the e&P and oil services industries,
there will be rapid consolidation with
survivors more attractive due to more
stable revenues and lower operating
costs. in addition, refining will become
more attractive than production, and
investor preferences will shift from
earnings growth to stronger balance
sheets.
•while the e&P sector as a whole will
continue to struggle with diminishing
returns and capital expenditure
reductions, companies with the
greatest efficiencies and strongest
balance sheets will be relatively
better off. for example, integrated oil
companies began cutting operating
Looking Forward – EFFEcts oF $50/BBL oiL Risks. RewaRds. ConsequenCes.
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Partner with
FTI Consulting
Whether you represent a company positioned
to take advantage of the recent market shifts,
or one simply looking to retain existing market
share, FTI Consulting provides unparalleled
expertise and innovative thought-leadership in
the oil and gas industry to help you address your
critical opportunities or challenges – whether they
are event-driven or long-term scenarios:
•Deals based on oil priced before the
drop will be increasingly uneconomic,
breeding disputes – including issues
around reserve study values, and how
(and when) the acreage was developed
•Forensic investigations to determine
what happened and, importantly, when
•Portfolio realignment activity will be
necessary throughout the vertically
integrated chain from oil and gas
exploration and production to fuel and
petrochemical production
•SEC/DOJ activity around financial
reporting issues (impairment charges or
lack thereof) and disclosures in MD&A,
press releases and earnings calls
•Lease/contract renegotiations
•Public policy (e.g., crude oil exports)
analysis
•Investor relations
•M&A and restructuring
communications
•Activist defense
•Valuation
•Corporate finance
•Intelligence gathering on overseas
sources of potential supply and
demand
•Litigation support
•Strategic stakeholder communications
•Financial and regulatory due diligence
•Core restructuring and asset sales
and acquisitions
12
FTI Consulting, LLP Looking Forward – Effects of $50/BBL Oil RiskS. Rewards. Consequences.
Contacts for FTI Consulting’s
Energy, Power & Product Segment
Bert Conly
Senior Managing Director
Corporate Finance
+1 214 397 1604
Brian Kennedy
Senior Managing Director
Strategic Communications
+1 202 346 8826
John Klick
Global Segment Leader
Economic Consulting
+1 202 312 9145
Ken Stern
Senior Managing Director
Forensic & Litigation Consulting
+ 1 212 651 7172
[email protected]
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