Energy Sector

[JRM]

Older generation combustion turbine generator plants can run in non-peaking situations now with low natural gas prices.  I was told years ago that these plants only ran when prices were over $100/MW.  That number stuck in my head, and it wasn't until I talked to an operator a few months ago that the break even price is now around $38/MW.  They run a lot more than I thought.

 

The newer generation combined cycle plants will continue to be built with the better economics of cheap gas.

 

I guess my point is low prices encourage more consumption of natural gas.

[opihiman2]

You guys are gonna get fucked:

 

https://www.reuters.com/article/us-saudi-oil-prices/saudi-arabia-slashes-april-crude-oil-prices-after-opecs-supply-pact-collapsed-idUSKBN20U0Y4

 

Sorry for the bad news.  My prediction is there's going to be a decade long bear market for oil.  Shale will consolidate, many producers will get wiped off the planet with the majors taking over assets, and it will keep a permanent lid on prices. 

 

edit: holy shit, I'm now hearing predictions that WTI is likely to go sub $20/bbl in a few months.  LOL!  Time to go short, even now!

[DooDiligence]

You guys are gonna get fucked:

 

https://www.reuters.com/article/us-saudi-oil-prices/saudi-arabia-slashes-april-crude-oil-prices-after-opecs-supply-pact-collapsed-idUSKBN20U0Y4

 

Sorry for the bad news.  My prediction is there's going to be a decade long bear market for oil.  Shale will consolidate, many producers will get wiped off the planet with the majors taking over assets, and it will keep a permanent lid on prices. 

 

edit: holy shit, I'm now hearing predictions that WTI is likely to go sub $20/bbl in a few months.  LOL!  Time to go short, even now!

 

All aboard the fear train.

[scorpioncapital]

I feel commerical real estate and oil both have very pronounced boom bust cycles but oil is more political and global , with sources only in some places and not others. Real estate on the other hand is more local and less dramatic I think. I guess oil is for those who love extreme volatility.

[JRM]

You guys are gonna get fucked:

 

https://www.reuters.com/article/us-saudi-oil-prices/saudi-arabia-slashes-april-crude-oil-prices-after-opecs-supply-pact-collapsed-idUSKBN20U0Y4

 

Sorry for the bad news.  My prediction is there's going to be a decade long bear market for oil.  Shale will consolidate, many producers will get wiped off the planet with the majors taking over assets, and it will keep a permanent lid on prices. 

 

edit: holy shit, I'm now hearing predictions that WTI is likely to go sub $20/bbl in a few months.  LOL!  Time to go short, even now!

 

Good.  I hope this flushes out some of the nonsense in the oil sector.  Just to be clear, natural gas is not the same thing as oil.  As long as there is demand for NG then the midstream companies will be in business.  Contracts may be renegotiated, but companies like KMI and WMB appear to have operational flexibility to withstand some short term pain.

[SharperDingaan]

You guys are gonna get fucked:

 

https://www.reuters.com/article/us-saudi-oil-prices/saudi-arabia-slashes-april-crude-oil-prices-after-opecs-supply-pact-collapsed-idUSKBN20U0Y4

 

Sorry for the bad news.  My prediction is there's going to be a decade long bear market for oil.  Shale will consolidate, many producers will get wiped off the planet with the majors taking over assets, and it will keep a permanent lid on prices. 

 

edit: holy shit, I'm now hearing predictions that WTI is likely to go sub $20/bbl in a few months.  LOL!  Time to go short, even now!

 

Consolidation is not a bad thing, particularly in NA, and US shale.

Thousands of analysts will disagree but the reality is, that at the margin, prices have long been driven more by politics than by change in supply/demand. Nobody makes money at these levels, so we will not be here for long. However, MbS is the royal who drove the failed Aramco IPO, the royal who ordered the botched Khashoggi killing, the royal who botched today's OPEC+ price support, and the royal driving the Yemen thing. It would be a lot better for literally everyone if the Saudi/Iran conflict ceased, and MbS has just put down what he thought was a US backed coup d'etat - including putting 3 more very senior royals (including his brother) in the Hilton.

 

To a great many in the NA industry, fracking has to go. It has severely disrupted the economics of literally trillions in capital investment, and severely damaged landholder relations throughout the industry. The only positive is that shale fields are really GAS fields that happen to CURRENTLY produce light oil/liquids; manage the current flow in a consolidated fashion, and you get decades of production of cheap, land-based, largely local, and clean gas as the dividend. In the US that means either kill shale via legislation (new president), or via bankruptcy and consolidation. Again, politics being the major driver.

 

Obviously, depending on your risk tolerance, volatility is either your friend or foe.

Hence, o/g, commodities, etc. is not for everyone.

 

SD

 

     

[rb]

The thing about energy hydrocarbon markets is that prices are very sensitive to supply. You're a little under supplied and prices skyrocket - the 2000s. You're a little oversupplied and prices plummet - the 2010s.

 

I don't see why the midstream systems have to be affected much by what's going on upstream. You only have to cut production by a little in order to balance the market so volumes won't be greatly affected. The locations of production will still stay the same. So if you have gas coming out of field A and you have power plant B that needs that gas and I am midstream guy C that has a pipe from A to B then why should I cut my tolls??

 

These midstream businesses also have chemical operations which would appear to be more volatile. But to me look like NGL export businesses. US NGLs are cheap and the world wants it and it's it's cheaper and safer to ship polyethylene and polypropylene than the NGLs themselves. So you process the NGLs over here. If there's a demand shock I suspect that the low cost producer (the US) will be ok.

 

This is basically how i look at it. I welcome people that know more about the space to tell me why I am wrong.

 

 

[Spekulatius]

The whole thing looks pretty deflationary. If we indeed get $20 or even just $30/ brl crude, not just shale, but oil sands won’t even generate cash flow, much less return on capital and even the oil majors are going to be unprofitable.  Midstream /LNG will see collateral damage as well. Huge losses in credit markets for energy, much higher than what we have seen in 2015.

 

I agree with SD that this seems somehow related with thr Saudi MbS putting 3 fellow princes on ice. I wonder if his “saw” crew gets more jobs...

[rb]

The whole thing looks pretty deflationary. If we indeed get $20 or even just $30/ brl crude, not just shale, but oil sands won’t even generate cash flow, much less return on capital and even the oil majors are going to be unprofitable.  Midstream /LNG will see collateral damage as well. Huge losses in credit markets for energy, much higher than what we have seen in 2015.

 

I agree with SD that this seems somehow related with thr Saudi MbS putting 3 fellow princes on ice. I wonder if his “saw” crew gets more jobs...

I disagree that it has to do with the relatives. It looks like he wants to punish Russia for not going along with the cut. The biggest discount is for NW Europe - Russia's market.

 

The question is if MBS can actually do it. It didn't work very well the first time he tried it. NA producers have proven to be very resilient. Who would have thought back in 2015 when he tried to pull this sort of crap that it was going to be the Saudis that are going to back off and not crappy producers from Oklahoma? I certainly didn't.

 

So I don't think that we can have a protracted period of 20 and 30 dollar oil. As you say the whole system just doesn't work at that level. So the system re balances itself either through an OPEC+ cut, or bankruptcies in NA or both. My guess is that it's gonna be OPEC+ cuts because it seems that they have less of a stomach for those kind of prices than NA producers.

 

But I think at the end of all of it you're gonna have hydrocarbons coming out from exactly the same basins that are coming out of today.

[DooDiligence]

You guys are gonna get fucked:

 

https://www.reuters.com/article/us-saudi-oil-prices/saudi-arabia-slashes-april-crude-oil-prices-after-opecs-supply-pact-collapsed-idUSKBN20U0Y4

 

Sorry for the bad news.  My prediction is there's going to be a decade long bear market for oil.  Shale will consolidate, many producers will get wiped off the planet with the majors taking over assets, and it will keep a permanent lid on prices. 

 

edit: holy shit, I'm now hearing predictions that WTI is likely to go sub $20/bbl in a few months.  LOL!  Time to go short, even now!

 

Consolidation is not a bad thing, particularly in NA, and US shale.

Thousands of analysts will disagree but the reality is, that at the margin, prices have long been driven more by politics than by change in supply/demand. Nobody makes money at these levels, so we will not be here for long. However, MbS is the royal who drove the failed Aramco IPO, the royal who ordered the botched Khashoggi killing, the royal who botched today's OPEC+ price support, and the royal driving the Yemen thing. It would be a lot better for literally everyone if the Saudi/Iran conflict ceased, and MbS has just put down what he thought was a US backed coup d'etat - including putting 3 more very senior royals (including his brother) in the Hilton.

 

To a great many in the NA industry, fracking has to go. It has severely disrupted the economics of literally trillions in capital investment, and severely damaged landholder relations throughout the industry. The only positive is that shale fields are really GAS fields that happen to CURRENTLY produce light oil/liquids; manage the current flow in a consolidated fashion, and you get decades of production of cheap, land-based, largely local, and clean gas as the dividend. In the US that means either kill shale via legislation (new president), or via bankruptcy and consolidation. Again, politics being the major driver.

 

Obviously, depending on your risk tolerance, volatility is either your friend or foe.

Hence, o/g, commodities, etc. is not for everyone.

 

SD

 

   

 

Interesting points.

[opihiman2]

I feel like oil will be in a long sideways bear market.  You have to trade it.  But, if oil heads into the $20's, I'm a buyer. 

 

I've posted about it in the past around 2015 when oil tanked to $30/bbl, and I think everyone on here said the best way to get exposure to oil prices is via the majors and mid streams.  Is that still the consensus?  All the oil futures based ETF's have sucked ass in getting direct exposure to oil prices.

[Spekulatius]

The whole thing looks pretty deflationary. If we indeed get $20 or even just $30/ brl crude, not just shale, but oil sands won’t even generate cash flow, much less return on capital and even the oil majors are going to be unprofitable.  Midstream /LNG will see collateral damage as well. Huge losses in credit markets for energy, much higher than what we have seen in 2015.

 

I agree with SD that this seems somehow related with thr Saudi MbS putting 3 fellow princes on ice. I wonder if his “saw” crew gets more jobs...

I disagree that it has to do with the relatives. It looks like he wants to punish Russia for not going along with the cut. The biggest discount is for NW Europe - Russia's market.

 

The question is if MBS can actually do it. It didn't work very well the first time he tried it. NA producers have proven to be very resilient. Who would have thought back in 2015 when he tried to pull this sort of crap that it was going to be the Saudis that are going to back off and not crappy producers from Oklahoma? I certainly didn't.

 

So I don't think that we can have a protracted period of 20 and 30 dollar oil. As you say the whole system just doesn't work at that level. So the system re balances itself either through an OPEC+ cut, or bankruptcies in NA or both. My guess is that it's gonna be OPEC+ cuts because it seems that they have less of a stomach for those kind of prices than NA producers.

 

But I think at the end of all of it you're gonna have hydrocarbons coming out from exactly the same basins that are coming out of today.

 

I think the issue with killing shale is that it’s like trying to kill weed. You can kill it temporarily, but once you stop weeding, it grows back very quickly. It is different thank Killing offshore oil, if you kill of an deep water oil project, it may take up to 10 years to get it up and running again. Shale will probably be back in 12 month or so.

 

However all the above does not prevent equity to be wiped out in shale E&P’s. Where I could be wrong is  NG. NG is partly depressed because Ng is produced as a byproduct of oil production, depressing prices. if oil production goes away, the associated NG production will as well and that may actually boost gas prices.

 

Then on the other hand we have LNG which competes with oil and Russian pipeline gas. It may become roadkill too, especially if NG in NA rises and oil prices world wide fall, thr spread will be reu Ed and many will become uneconomic.

 

Interesting times. I will stay away from E&P’s, but I am rebuy WMB and possibly buy EPD for the first time. I have no idea who this plays out other than it will be messy and most likely a bloodbath for shale E&P equity

 

There could be interesting opportunities in midstream credit. I was able to buy some 10% bonds in 2015 (OKE, BB+ rating and they were money good), I look forward to similar opportunities. I don’t think I will mess with E&P credit, the FCF to service debt just isn’t there, because of the decline rates.

[ValueArb]

The whole thing looks pretty deflationary. If we indeed get $20 or even just $30/ brl crude, not just shale, but oil sands won’t even generate cash flow, much less return on capital and even the oil majors are going to be unprofitable.  Midstream /LNG will see collateral damage as well. Huge losses in credit markets for energy, much higher than what we have seen in 2015.

 

I agree with SD that this seems somehow related with thr Saudi MbS putting 3 fellow princes on ice. I wonder if his “saw” crew gets more jobs...

I disagree that it has to do with the relatives. It looks like he wants to punish Russia for not going along with the cut. The biggest discount is for NW Europe - Russia's market.

 

The question is if MBS can actually do it. It didn't work very well the first time he tried it. NA producers have proven to be very resilient. Who would have thought back in 2015 when he tried to pull this sort of crap that it was going to be the Saudis that are going to back off and not crappy producers from Oklahoma? I certainly didn't.

 

So I don't think that we can have a protracted period of 20 and 30 dollar oil. As you say the whole system just doesn't work at that level. So the system re balances itself either through an OPEC+ cut, or bankruptcies in NA or both. My guess is that it's gonna be OPEC+ cuts because it seems that they have less of a stomach for those kind of prices than NA producers.

 

But I think at the end of all of it you're gonna have hydrocarbons coming out from exactly the same basins that are coming out of today.

 

Doesn't lower prices mostly just hurt (or delay) additional investment in the fields? Exploration and development are typically the expensive parts, when prices drop existing fields are mostly still going to pump and process similar amounts of oil, gas and shale.

 

I think this is just Mr. Market running around in a tizzy begging us to buy his half of the business. The Saudi's can't run their country, let alone a war, on $20 oil without massive spending cuts. Putin needs higher oil prices to prop up his regime.

 

In interests of full disclosure, I have zero track record in predicting the future, but I can't see lower prices lasting long. Months sure, but not years. 

[rb]

I agree with spek on most of what he said above. I think that upstream will be a shit show for a long time.

 

As I wrote above, I don't think that you can have production at $30 bbl. So I don't think we'll be there or below for a long time. If we do get there I'm just gonna do what I should have done last time. Buy physical oil futures. Not mess around with ETF but the actual futures.

 

In the future after a protracted unfavourable price environment you may see consolidation in the industry. But the oilman is a special breed. And the oilmen of today are not just gonna become accountants they're gonna shuffle around in the industry. So there'll still be the same guys there after consolidation. So what will the do when they see $60 a barrel prices? Drill Baby Drill!! Then prices get bonked again.

 

The only way you see significant money upstream is through supply and demand shocks. The 80s were great because of the decline in the conventional Texas oil fields (supply). The 90s sucked because OPEC decided to stop being a dick (or perhaps they got tired of tomahawk missile showers). The noughts were great because of India and China came alive (demand). But right now we're out of Indias and we're out of Chinas. It doesn't seem that field depletion is an issue, and at $80 you can get your fill of oil sands barrels and boy there's a lot of that stuff. So there's no demand or supply shocks as far as the eye can see.

 

But we still need lots of oil and NG (especially) for the foreseeable future. To me that's why midstream is interesting. I see it like owning a bridge. You want to get from A to B? Well you'll have to use my bridge. The only negative that anyone has brought about midstream seems to be along the lines of "you can't do well if your customers are hurting". But there have been businesses that have been making tons of money off of poor people for years. For example credit card companies (I know, not a perfect analogy).

 

Now taking the bridge analogy further. The only way the bridge is not a good investment is if you pay too much money for the bridge. The opportunity and folly comes from categorizing these companies as "energy" companies. So their prices are correlated with prices for pure play and integrated producers. Lately with indexing and ETFs this is probably more so. But they're not energy companies, they're infrastructure companies. You wouldn't link the price of a bridge with the price of GM stock, would you? So the opportunity and folly comes from this correlation. When energy is doing well these companies become really expensive relative to their economics. But you can pick them up cheap when energy is doing poorly - such as today.

 

Or I don't understand the space, these aren't bridges and i'm whistling Dixie out of my ass.

[rb]

Doesn't lower prices mostly just hurt (or delay) additional investment in the fields? Exploration and development are typically the expensive parts, when prices drop existing fields are mostly still going to pump and process similar amounts of oil, gas and shale.

The way I understand it is that in the world we are today with shale you have to do more drilling because a fracked well has a shorter life than a conventional well. So you have to continuously invest in drilling to be able to fracture new wells. If you don't the production of the field declines.

 

So you can't drill because you're broke and the capital markets are telling you to buzz off then you should see production declines.

[Viking]

Perhaps we will see capitulation in energy shares if we see oil fall to the low 30’s. i have owned Suncor in the past and will continue to follow. Canadian $ futures are trading down 1%...

 

Is shale an important part of the American economy? Need to brush up on what happened in 2014-2016...

 

Saudi Arabia flooding market with oil, prompting predictions of further decline Monday

- https://www.washingtonpost.com/business/2020/03/08/saudi-arabia-flooding-market-with-oil-prompting-predictions-further-decline-monday/

 

Saudi Arabia is making a 180 degree turn and moving to flood a market depressed by the coronavirus with hundreds of thousands of barrels of additional oil per day. And it is offering steep discounts to refineries around the world.

 

It’s the beginning of an oil price war between the Saudis and Russia – but it’s going to put a tight squeeze on American shale oil producers, as prices are expected to head sharply downward. While it lasts, of course, that’s good news for oil consumers but a concern in areas of the country that rely on jobs in the energy sector.

 

West Texas International crude, one of the industry’s price benchmarks, fell 10 percent Friday before the Saudi announcement, closing at $41.28 a barrel. Analysts expect it to fall into the $30’s – perhaps deeply into the $30’s – when markets open Monday. The last time West Texas Intermediate fell below $40 was in August 2016.

[Gamecock-YT]

WTI $32

 

Brent $36

 

 

Face-ripper

[SharperDingaan]

This isn't going to last long.

 

Nobody makes enough money at this level, and it isn't going to bankrupt US shale unless it goes on for at least 4-6 months. All it does is allow the refineries to max out their on-land and at-sea storage, while borrow costs and storage are dirt cheap. Then as/when prices rise it will be on diminished volume until the storage is worked off. Friends helping friends, ensuring lots of cheap gasoline is available just before the US election?

 

However, Aramco is down 19% since issue, and continuing to fall. At some point Aramco is going to buy the issue back, and the lower the price, the better. It'll be a very profitable swing trade, and will go some way to offsetting the opportunity cost of flooding the market. The Russians either do as asked, when asked, or take the opportunity loss; which do you think is the more likely? 

 

SD

[Guest cherzeca]

these oil prices are [cue crazy Eddie] insane!!!!!

[meiroy]

With the current administration, why is it expected that they -- foreign governments -- be allowed to destroy local industries? 

 

Who knows what's going to happen but it seems to me, as reasonable speculation, to assume a proactive action to protect and support local shale/oil companies.

 

(I'm completely clueless about the energy sector, just looking at the macro)

[Spekulatius]

With the current administration, why is it expected that they -- foreign governments -- be allowed to destroy local industries? 

 

Who knows what's going to happen but it seems to me, as reasonable speculation, to assume a proactive action to protect and support local shale/oil companies.

 

(I'm completely clueless about the energy sector, just looking at the macro)

 

If he protects the energy industry with higher prices, he will destroy related industries like chemicals, refineries, as they become uncompetitive. So I don’t think the energy industry can be saved via higher prices in the US only. It is also not fair to let the consumer bear the costs. Tough to know how long it lasts. In 1998, crude went to <$10/brl for a short time. Also note that the OPEC is basically a cartel and has tried to fix prices for a long time. So maybe  what we are seeing now are true market prices, if such a thing even exists with the energy markets.

 

I think the sector just needs to dramatically shrink. The interesting question is what happened to NG, which still is more or less landlocked, except form LNG export capacity. It could benefit from less NG being produced as a byproduct. That on the other hand creates a problem for the US chemical industries since they have benefited for a long time from cheap NG compared to crude input. With that advantage gone, This industry could get squeezed.

 

Glad to be watching this from the sidelines for now.

[mcliu]

Low oil prices are probably a net positive for US economy, so bailout seems unlikely..

The strongest players will survive, consolidate and probably be better positioned for next upturn.

Maybe a new cartel will form, Middle East+Russia+US.

[Gregmal]

I am hardly an energy expert and have avoided the sector like the plague, but I would agree lower oil prices are a net positive for consumers. Its also probably relief for airlines, who right now could use every break they can get. At least the ones who dont hedge/modestly hedge.

[thepupil]

https://fred.stlouisfed.org/series/SAUPZPIOILBEGUSD

 

I will likely add to my “I’m dumb and don’t want zero energy” basket tomorrow (XOM,MMP, BSM)

 

If we stay down here in the $30’s my biggest fear is the political instability, not the <5% in energy stocks I’ll have.

 

 

[meiroy]

Low oil prices are probably a net positive for US economy, so bailout seems unlikely..

 

 

This rationale cannot be applied to the current administration based on its previous actions.