Betting on Oil
With the recent vote on H.Con.Res. 112, investors can breathe a sigh of relief.
The measure, a non-binding, concurrent resolution that does not require presidential approval, is aimed at preventing a $10-per-barrel tax on oil to fund transportation projects like highway repair (via a federal funding mechanism).
The measure passed the House by a more than three-fifths majority. That vote was largely because Republicans now control the House by 29 seats, but it’s also noteworthy that 23 Democrats crossed the aisle and voted ‘nay” across party lines.
In any case, the numbers were sufficient to assure that oil prices – already pressed by historic lows, a global glut, and the emergence of “green energy” as a conscientious-objector touch point – will likely not fall farther, and gasoline/diesel will remain highly affordable to today’s cash-strapped American middle class.
The sole Republican contrarian was Rep. Richard Hanna (R-NY), who believes the measure would have provided a good funding tool for the soon-to-be-insolvent Highway Trust Fund. Hanna argues that “…all options should remain on the table until a solution is agreed upon”. The nation’s roads are a mess, and nowhere more so than in Rep. Hanna’s home state.
The next step in the process is a review by the Senate Committee on Finance, and then – if all goes well, a resounding defeat in the Republican-dominated Senate (54 R, 45 D, 2 Independents). This will delimit the danger of an oil tax, at least until the next election because, as we all know, taxes (not riches) trickle down.
There is no doubt oil is in trouble. On June 14, Brent crude oil futures fell 50 cents to $49.85, the loss based on uncertainty about Brexit. Crude futures also fell in the United States, though much less (down 40 cents, to $48.48 a barrel), even though the U.S. has up to now seen the biggest price plunge in oil in the wake of the 2014 price plunge.
As a result, the industry is doing some seriously needed belt-tightening – a $1 trillion across-the-board global cut that analysts at Wood Mackenzie, Ltd. estimate will translate into less than $500 billion in exploration and development by 2020. This is 22 percent less than anticipated in late 2014, and the downturn is expected to persist as oil and gas firms use revenues to repair balance sheets rather than expanding E&D.
Some very cash-strapped companies are not merely idling equipment and oil patch leases, but actively withdrawing by selling rigs and leases. Chariot Oil and Gas, Ltd., (OTC: OIGLF) for example, recently announced that it would not pursue its exploration license in Mauritania at this time, and the response is far from unique. The result is a loss of one-third of the world’s drillship and semi-submersible floating platforms.
Chariot's explanation? “...this decision (to put a lease on hold) was made in line with the company's strategy and focus on portfolio management and capital discipline.” A Capex-inspired refrain that has become hauntingly familiar to firms like Terra Energy Partners LLC, Chesapeake Energy Corp. (NYSE: CHK), and WPX Energy, Inc. (NYSE: WPX).
Withdrawals, idled rigs, and a gradual selloff of both equipment and the world’s oil glut will eventually restore industry profit.
The gains will be slow – even slower than the three-year, post-1999 oil price recovery. Several factors come into play. One is a “proven reserves” overestimate designed to make borrowing easier that has since been downgraded. Another is the dizzying speed at which renewable energy is being developed and slotted into the grid. In fact, one analyst estimates a decade before renewed oil production even begins to pay off.
Ultimately, experts say, the industry will cut an additional $300 billion planned for exploration and drilling, lowering 2016 production figures by about 3 percent. Meanwhile, riggers from North Dakota to Texas wonder where the next paycheck is coming from, and Europe waits on Brexit to determine how low the price of oil may go.
But not all is lost. Industry consolidation during hard times can lead to improvements, as witness the solar industry bankruptcies, merger, and buyouts from 2009 through 2013, which led to a more robust, cost-effective, user-friendly industry that is now seeing significant gains.
As aging nuclear power plants are decommissioned, and coal becomes the literal “bête noir” of the energy industry, oil (and, by extension, natural gas) will become baseload supply to support burgeoning renewable energy resources.
"We continue to believe the longer-term recovery is the bigger and higher conviction event in a lower conviction world, and we would add risk, yet not go 'all-in' here," Morgan Stanley said.
Monday’s market confirmed that. Stocks rose, and then fell. Except for oil, whichremained upbeat on news that stockpiles were falling at the same time that the EIA raised short-term demand for Q2 and Q3. Crude gained 2.9 percent on the NYSE to close at $49.37, its highest since June 10.
Even skeptics remain upbeat, noting the continuing battle for market share and the fact that the U.S. shale oil industry “isn’t about to throw in the towel”.
Brexit has not seriously affected that optimistic mode. Post-Brexit, oil prices dipped to daily lows that haven’t been seen since February 17, but still held at $48.41. Some analysts see moderate, long-term effects thanks to the uncertainty Brexit has dropped on the world stage, but others – like John Kemp of Reuters – think the split will have little impact on the oil industry.
Britain, using less than 1.6 million barrels of oil per day, is protected from the potential unreasonable tariffs implied by breaking from the European Union by abundant U.S. stockpiles.
Companies to Watch:
WPX Energy, Inc. (NYSE: WPX) traded at a high of $24.09 in October of 2014, and is now priced at $9.51, or .14 cents higher than its close on Friday, June 17. Analysts say the increasing value is the result of rising oil prices, but at least one ratings agency dubbed it “outperform”. WPX holds leases in two of the major oil-producing areas in the U.S. – the Permian Basin and the Williston Basin, and sits on 583 million barrels of proved reserves.
Chesapeake Energy Corp. (NYSE: CHK) rose Monday, June 20, reportedly on damped-down fears of the UK (Great Britain, or Brexit) leaving the European Union (EU). Analysts say that if Brexit doesn’t happen, the price of crude oil will rise to (and perhaps exceed) the $50-per-barrel price that makes oil extraction economically feasible.
Marathon Oil Corp. (NYSE: MRO), trading at about half its historical value – like most independent oil and gas producers this year – also saw stock prices rise on Monday on the belief that Brexit is a no-go. An even greater push, however, came from Marathon’s news that it was buying the assets of PayRock Energy Holding’s (in Oklahoma) from VC firm EnCap Investments.
Advantage Oil & Gas Ltd. (NYSE: AAV) surprised investors by moving sharply upward on Monday, June 20, continuing what many viewed as a bullish streak. Advantage operates primarily in Canada, and was largely spared damage during the recent Fort McMurray wildfires. Their operations, at the Glacier field, are cost-incentivized at less than $0.35/mcfe (the equivalent of 1,000 cu. ft. of natural gas).
Denbury Resources (NYSE: DNR) also rose a hefty 5.44 percent Monday on rumors that Brexit will fail. This is in line with the 5.8-percent increase over the last month, and has analysts suggesting that Denbury might be a stock to watch.
Jeanne Roberts is an award winning freelance writer covering the environment, sustainability, social justice, health, politics, and the natural world. She has roots in the corporate world as a California reporter and a communications specialist at a large public utility and has spent the past 10 years working as an editor for a small-cap stock site, and as an environmental/political/social justice blogger for The Panelist, Celsias, Cooler Planet, DeSmogBlog, Energy Boom, SolveClimate.com, the Clean Tech Blog, EarthTechling, and various other online publications. Ms. Roberts has written a book on alternative energy sources, sustainable home building, and environmental initiatives for homeowners available on Amazon.