US indies brace for losses as outlook worsens
OREANDA-NEWS. October 14, 2015. US independents are bracing for their worst quarterly results in years. And a bleak crude price outlook will keep a cloud over their spending plans well into 2016.
The dip in the market after a brief recovery in the second quarter has rendered insufficient all major cost cutting measures of companies such as ConocoPhillips, Continental and EOG. Goldman Sachs predicts that a growing surplus could push prices as low as \\$20/bl and Morgan Stanley compares the severity of the crash to 1986, when prices fell to below \\$20/bl. The tone will differ from the earlier quarter where oilfield services providers pointed to tentative signs of improvement and most companies raised their 2015 output guidance.
"The narrative for Q3 earnings season will be grim, both with regard to current industry conditions as well as the threatening visibility heading into 2016," analysts at Simmons and Company said.
With oil prices holding below \\$50/bl through the quarter, and with an outlook of a lower for longer market, companies are under pressure to cut costs further and find newer sources of cash to plug the gap between inflows and spending. So far this year, almost every independent saw their net cash flows drop into negative territory. They have raised more debt, sold shares and assets and pulled back on drilling to fill that gap.
Key Bakken producer Continental, which did not generate positive cash inflows even during a strong market in the first half of 2014, incurred a free cash flow deficit of \\$1.05bn in the first half of this year from a deficit of \\$645mn a year earlier, which it plugged by borrowing more. Its credit facility borrowing rose by \\$1.38bn in the first half from \\$1.10bn a year earlier. It made a credit facility repayment of \\$315mn in the first half versus \\$1.38bn a year earlier.
Top US independent ConocoPhillips had negative free cash flow of \\$1.7bn in the first half compared with a positive \\$2bn in January-June 2014. It took on an additional \\$2.5bn of debt in the second quarter to help meet the shortfall.
"The vast majority of oil producers are still spending beyond their means, and absent much higher oil prices, they are self-liquidating," Oppenheimer said. "Efficiency improvements, spending cuts and cost reductions only partially mitigated the impact of low oil prices."
In addition, the worth of the companies' oil and gas reserves, their main asset, is declining. Moody's Investors Service expects banks to lower their oil price expectations by 15-25pc for 2015 compared to their forecasts in the spring, "significantly reducing" companies' ability to raise funds. Moody's rates 113 independent producers, of which 90 are speculative grade, which means they face substantial credit risk. "Most of these non-investment grade companies fund their operations with secured oil and natural gas reserve borrowing-base (RBL) facilities," it said. "The average borrowing base decline was -15pc, but the decline ranged from almost no change to -40pc decline."
"American shale oil production has so far been more resilient financially and more competitive technically than expected. But because a large chunk of loans needs to be refinanced this month, producers are now looking for new cash flow to survive," Shell chief executive Ben van Beurden said at the Oil and Money Conference in London. "And with West Texas Intermediate (WTI) prices between \\$40 and \\$50 a barrel, they'll possibly struggle to get it."
But larger producers "have the required flexibility to tide them through the near term at the very least," Wood Mackenzie said, with smaller and financially stretched companies are likely to "eventually" fail. "At least two thirds of Lower 48 production is attributable to companies with no RBL exposure at all, or have no redeterminations until 2016."
The pressure on the industry is also high as hedges are rolling off. Wood Mackenzie estimates that cash flow from hedging falling to \\$2.2bn in 2016 from \\$9.1bn this year, taking away a major cushion that had helped absorb some of the impact of the downturn.
Producers like Apache have benefited from asset sales. The independent earned \\$1.9bn from operations and made a positive net investment of \\$2bn, as capex and other costs of \\$2.3bn got offset though asset sales of \\$4.3bn. That allowed Apache to repay \\$1.6bn in debt. Whiting is "well on the way" to sell assets of as much as \\$1bn this year, chief executive James Volker said. Chesapeake and Devon are also looking at asset sale.
As assets get sold off, employee redundancy will increase, possibly forcing producers to lay off staff to cut costs. ConocoPhillips and Chesapeake have already announced cuts in a possible precursor to similar announcements.
"The only good news about 3Q15 is that it is over," Oppenheimer said.