I plan on posting a weekly discussion topic called "This Week in Oil and Gas" to highlight news of the week (topics well vary). I am open to any suggestions and will hope that other users participate and post their thoughts.
Here we go!
Industry News
Saudi Aramco IPO does NOT include oil reserves
The chairman of Saudi oil giant Saudi Aramco was quoted as saying a possible initial public offering would not include the kingdom’s oil reserves.
Chairman Khalid al-Falih made the comments to Saudi privately owned broadcaster Al-Arabiya in an interview from Davos, Switzerland. The Dubai-based broadcaster reported the comments Sunday. Al-Falih also says the potential share flotation could take place on local or international markets. (FuelFix)
Schlumberger beats estimates...announces more cuts
SLB reported Q4 revenue of $7.7 billion, down 9% sequentially and Q4 earnings dropped 57% to 65 cents a share, beating analyst expectations of 63 cents. During 2015 SLB bought back $2.2 billion in stock and announced a further $10 billion in stock repurchases for 2016.
The 10,000 layoffs which were rumored to have occurred in December have been confirmed, taking total SLB layoffs to 30,000. The service operator continues to face abrupt work cancellation and was the prevailing theme in the earnings release.
Malaysian Bank Rejects All Loan Applications To O&G Workers
Bank Simpanan Nasional has acknowledged an internal policy of rejecting all O&G workers applications for loans and credit cards. This move is being made as a precaution amid the inherent risks in the O&G industry per a statement by the bank.
One Gallon of Milk > Two Gallons of Oil
Crude oil is at a 12-year low and that means it’s even cheaper than milk. The price of one gallon of West Texas Intermediate crude is equivalent to about half a gallon of Class III milk, the benchmark traded on the Chicago futures market. That’s the lowest ratio since 2004 (Bloomberg).
Saudi Arabia unwilling to make space
"We are not going to accept to withdraw our production to make space for others," Saudi Aramco Chairman Khalid al-Falih said during a panel discussion in Davos. Saudi Arabia's production is now at 10.3 M/bpd but is wiling to make some short-term adjustments but only if other nations follow suit.
Offshore Update
Analysts are reporting that the current downturn will be worse than that of the 1980s. Due to CAPEX cuts ultra-deepwater rig utilization are expected to approach 50% by 2018 (currently at 76%). Leading edge day rates have dropped by $200K/day. For jackup rigs in the Gulf of Mexico only 9% of the rigs are under contract, the lowest levels on record.
Onshore Update
One consistent theme has been continued pricing pressure. For AC driven land rigs spot rates are currently hovering $15K/day with some contractors offering additional pricing discounts in exchange for term extensions. Despite this some contractors have already received early termination notices such as H&P which received 12 additional termination notices for land rigs in the US.
Articles of Note
Oil below $30 fans wipeout fears among U.S. shale survival artists
This is awesome! Keep it up I will try to help when and where I can, or at least toss out SBs to show my appreciation.
realjackryan thanks for the feedback and yes, suggestions are welcome.
To continue the discussion I have been wondering how much of an effect the financial reforms surrounding prop trading have had on present commodity market conditions?
Do you think there is a link or was the impact investment banks had on the commodities market was minimal?
Saudi Aramco IPO is progressively becoming less and less ludicrous.
Ask yourself this: who would support and buy into that IPO? Essentially subsidizing low oil prices and kicking the lower-for-longer-oil-price can down the road..
It's not a subsidy...Saudi break-evens are like ~$10/Bbl, the company is wildly profitable in the current oil price environment.
So the answer is investors that could get comfort around buying into an extremely profitable company despite knowing that it will always be government-controlled. That's who would support and buy into that IPO
Is that verified fact that saudi break-evens are ~$10/Bbl? Keep in mind their motivation for IPO'ing Saudi Aramco - they are undeniably feeling the pinch of low oil prices and have burnt through over $100bn in foreign reserves over the past year alone. They are running a budget deficit and trimming spending.
Not sure there a lot of those around who would get comfortable owning part of a government-controlled asset in these uncertain geopolitical times especially when new leadership (US or Saudi) could change in a year's time potentially changing the status quo.
The $10 figure gets thrown around quite a bit but, with Saudi Arabia being a petro-state it all depends on what the governments goals are. Saudi Arabia has large social programs and safety nets that it has to spend on to avoid protests and social upheavals.
I'll have to take some time and read through these but these articles are trying to answer the same question:
Saudi Arabia Fiscal Break Even Price
Break Even Analysis for Saudi Arabia
Links are broken for me. I agree with you that they have large social programs and safety nets that they know they need to maintain, esp given the recent political unease. My point is what they've been echoing and will continue to echo is that they will unrelentingly keep pumping supply until the US and other suppliers cut their production in order for saudi to maintain their share of the market; whether this proves to be realistic is a different question. The Aramco IPO I feel is a theoretical exercise to prove that they will be fine 1,2,3, however many years out such that they would be able to hypothetically use the ipo proceeds to keep their economy and budgets stable. At this level their foreign reserves would get depleted within 6,7 years. However I just dont see international interest in participating in an ipo in a region that is more volatile and where there is no guarantee of your assets not being appropriated at some point in time. Let alone the infinitesimal and catastrophic possibility of trump winning the election...
I've fixed the links so they should work now. As for interest in the IPO, I think they will find investors and not necessarily American ones. I can see the Chinese showing interest in an IPO as an example.
As for the region being volatile, yes you're correct however I would say Saudi Arabia will remain stable in terms of the royalty and its influence. America will most definitely do whatever it needs to (as well other nations) to ensure that Saudi Arabia doesn't turn into another Syria, Libya, etc. With this being said the risks I see with an IPO is the government screwing investors over and not allowing them to have a say in how the company operates.
I highly doubt Saudi Arabia will do so because if it does it will turn into a pariah and be blocked from the capital markets, an area the kingdom has been trying to expand and tap into.
Lastly lets all hope Trump doesn't win..and this is coming from a conservative.
Two different types of "Saudi breakevens" we're talking about here.
The one I'm talking about (~$10) is the price of oil Saudi Aramco needs for their wells to be economic. i.e. If they drill a well, it will provide a positive rate of return. It has nothing to do with government programs or government goals
The one you're talking about is the price of oil the Saudi government needs to break-even fiscally; for their government revenues (which they receive from Aramco) to cover their expenditures (social programs, etc.).
The distinction is important, because capital allocation decisions will be based on the former. And if you're a private investor considering investing in Aramco, you don't really care how the Saudi government is doing, as long as you are receiving your fair proportion of the distributions Aramco is making
This is a good idea.. may contribute with a weekly Ags update in sync with this - would be good to have some content like this to go along side the rest of the forum
hey GMG if you decide to do a post like this on a regular basis definitely let me know, would be great content
thoughts for food (for all you recently laid off E&P bankers): if you lever an MLP at 6.0x take or pay EBITDA and all your E&P counterparties go bankrupt (after exchange debt to second lien ofc) after you've built out gathering/interstate assets then reject your acreage dedication commitment in bankruptcy court (unsecured claim you dummies) what happens? asset class ponzi scheme goes kaboom
With the Aramco IPO, I would think there is a serious risk of Saudi expropriating foreign ownership of the company if/when oil prices rise a few years down the road, especially given the uncertainty of leadership in the government even in the near term. When oil prices rise there will be huge pressure on the royal family by the Saudi people to keep those earnings at home.
I don't know how exactly that would work, but anything is possible in that part of the world.
Great idea and good post. You should add breakdowns for Upstream, Midstream, and Downstream/chemicals
If you are interested in the oil and gas industry, I recommend, "The King of Oil: The Secret Lives of Marc Rich." Great read.
Do you have any primers on the oil and gas industry? Also, what are your thoughts on US production right now. A lot of figures are thrown around but broadly it seems as if production is declining but at a slower rate than initially expected and lack of significant demand growth on the other-side.
Deutsche Bank has an O&G primer you can Google and find. If you are a beginner then I've been told Oil 101 by Morgan Downey is also a good book.
I'll have to research but I can pull some data for you to show production levels and rate of decline (if I can find it) and I'll post it to this thread.
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