Volatility fails to move markets like it used to

By Nathanial Gronewold | 05/16/2016 08:01 AM EDT

HOUSTON — More than 3 million barrels of crude oil in production went offline last week from wildfires, civil war and violence. The markets didn’t seem to care.

HOUSTON — More than 3 million barrels of crude oil in production went offline last week from wildfires, civil war and violence. The markets didn’t seem to care.

More oil companies continued entering into bankruptcy, as well. And while some oil-and-gas-related companies are also emerging from Chapter 11 bankruptcy court protections, the near-term outlook for them is just as murky as it is for the industry as a whole while oil price volatility lingers.

Wildfires in Alberta forced closures of about 1 million barrels a day of Canadian oil sands production, though much of that is coming back online. Violence in Nigeria prompted Royal Dutch Shell PLC to curtail the output of hundreds of thousands of additional barrels. The unrest in Libya drew more crude off the global market.


Yet the price of oil seems stuck at just above $45 per barrel as bearish economic data and record volumes of crude in storage convinced commodity traders that now was not the time to launch an oil price rally. Worries about the pace of global economic growth weighed on crude prices, as well.

Companies reporting earnings for the first quarter of the year are also saying that spending cuts industrywide appear steeper than those previously announced at the end of 2015, likely driven by a swoon earlier this year that sent oil prices below $30 per barrel. Exploration and production (E&P) spending cuts could mean that up to 4.5 million barrels per day of additional production that would have come online may not be realized, according to an assessment by market consultancy Wood Mackenzie.

"The oil price kind of shock in February to sub-$30 levels exacerbated the situation and pretty much pushed everything even a little bit lower," said Stacy Locke, CEO of Pioneer Energy Services, in a call with investors. "So it was a challenging quarter. Kind of happy to have it behind us."

Other oil field service companies are reporting steeper cuts to capital expenditures than initially expected. Offshore drilling service providers, in particular, continue to feel the pain. Well operators that are drilling offshore are demanding steep cost reductions as they struggle to keep their businesses viable.

Paragon Offshore earlier filed for Chapter 11 bankruptcy, and executives there said they are still navigating their way out. CEO Randall Stilley said his company remains "engaged in negotiations with various lenders" to reduce the company’s outstanding debt.

Stilley said Paragon’s review of the spending plans for 47 of its potential E&P customers showed first-quarter spending at levels 36 percent lower than at the same point in 2015. "These figures do not include the significant cuts by national oil companies," he added, singling out Petrobras of Brazil and Pemex of Mexico.

He said the outstanding debt held by E&P companies was "unsustainable" at current oil prices, and Stilley warned that further capital expenditure spending cuts are likely. "We will continue to see companies restructure their balance sheets."

Vantage Drilling, another offshore drilling rig operator, emerged from its Chapter 11 debt reduction and restructuring in February. The outlook for the new "successor" organization is still tough. Vantage reported an approximately $500 million loss for the first quarter, with $30 million of that accrued post-restructuring.

Onshore, the picture is largely the same.

Magnum Hunter Resources announced its emergence from Chapter 11 last week, having been saved from insolvency in large part because of a massive exchange of debt for company equity. Now the company must wait for natural gas prices to increase to shore up its future, as it maintains holdings in the Marcellus Shale and Utica Shale basins. It may be a while before oil prices rise high enough to see Magnum Hunter’s Bakken Shale assets lifting its long-term prospects.

The list of Chapter 11 filings for oil and gas continues to build, with Linn Energy, Berry Petroleum and Penn Virginia joining last week. On Friday, EXCO Resources of Dallas said its board of directors had formed a special committee to look at that company’s books and "evaluate, develop and recommend one or more strategic alternatives."

‘Challenging discussions’

An earlier Wood Mackenzie assessment estimated that around $380 billion worth of major oil and gas capital projects has been canceled globally since crude prices began their slide down in mid-2014. Closer to home, the steep pullback in spending by oil and gas is having a big impact.

Industrial Info Resources, a heavy industry research company, reported that "planned industrial project spending for North America" for 2016 has dropped by more than $33 billion compared to 2015 levels. That company said oil and gas production contributed substantially to the drop, as did the power sector and metals.

Oil and gas supermajors are leading the spending cuts, as are national oil companies as Stilley at Paragon indicated. These mega-companies are also best poised to survive the downturn, and perhaps benefit from it, as they can acquire attractive assets on the cheap, either at auction or from smaller, more struggling oil and gas operators seeking to raise cash.

Not all of the small guys may be destined for Chapter 11.

Halcón Resources is so far holding its own through cost-cutting and an aggressive hedging strategy, allowing it to sell barrels produced at much higher prices through crude oil futures contracts. But Halcón is also still in negotiations with creditors to reduce its debts, essential for avoiding the bankruptcy courts.

"We’re talking to all of our stakeholders on a more comprehensive balance sheet effort," CEO Floyd Wilson said. "These are, as you might expect, challenging discussions."

Halcón’s management team tried to maintain an optimistic outlook, but the tone of their talk with analysts suggested that company is in a holding pattern, doing whatever it takes to keep the company’s head above water long enough to ride rising oil and gas prices out of this downturn.

"Of course we didn’t plan on $30 oil or $40 oil, but we do have that, so there’s no timetable for all this," Wilson said. "We will continue to operate the company in an appropriate manner."