Conventional oil & gas projects still a good long-term investment.

The current state of the oil and gas industry has it’s challenges, that is for sure as noted in the article below. But despite an upraise in mergers, bankruptcies, shale slow downs and a drop in rigs…there is still a level of optimism in the Industry that some find hard to see.

True there has been a rise in uncompleted wells but it’s the cup half full, cup half empty scenario.. what do you see? companies protecting their assets by meeting deadlines that enable them to hold onto valuable assets without having to complete projects they aren’t ready to complete.

..Or do you see companies not completing projects and think the project must be a bust. There seems to be a lot of fuss about uncompleted wells lately and how the states aren’t prepared for a boom in abandoned wells as more and more companies collapse.

And then on the other hand you have the “oh no there is no good oil prospects left, they are going back to previous site projects and reworking them’. Erm…ok.. that does happen, but that’s not always the case.

Agee described drilled, uncompleted wells as cans of commodity sitting on companies’ shelves that they can wait to open when market prices improve.

Shale may be slowing down and may have been the poster child for Oil & Gas for the last few years… but independent conventional drilling projects are starting to show growth in a quiet, modest way that may end up surprising a few people. It has been discussed before how the lack of conventional drilling projects will have an impact on future oil. There are still those independents in the Industry that are quietly investing in such projects and aren’t scared to go big….or go home. The high costs and rapid production declines over short periods of time that are associated with Shale projects, make conventional projects even more attractive to investors looking for long term, steady cash flow projects. Those who are looking to invest for the long-term will still be reaping the rewards 10, 20 + years down the road.

“These markets aren’t going to go away. We will see a return at some point to a more vibrant industry,” Agee said. “It is just going to take a while.”

Oil and gas companies have no shortage of challenges to overcome during the latest oil patch slowdown

Jack Money

byJACK MONEY

A worker checks tanks at a field location. Abundant supplies of crude oil and natural gas have depressed prices, causing a slowdown in drilling and completion activities.
A worker checks tanks at a field location. Abundant supplies of crude oil and natural gas have depressed prices, causing a slowdown in drilling and completion activities.

EL RENO — Halliburton’s decision to close its office in El Reno highlights the perils ongoing headwinds pose to companies that produce oil and gas and the companies that support them.

Certainly, low market prices for oil and natural gas are no help.

But unrelenting expectations for appreciable returns from impatient investors also are making it tough on both producers and service companies within the industry, economists said this week.

Jeff Miller, Halliburton’s chairman, president and CEO, recently reviewed those challenges and others faced by his company and others with analysts during an October earnings call.

“We’re reducing costs. You’ve seen us do this before,” he told them, noting the company cut $1 billion in costs in 2016, reorganized North American operations earlier this year to reduce costs further and continues to look for ways to improve its bottom line.

“Looking ahead to the fourth quarter, we see more of the same,” he told them. “We expect customer activity to decline across all basins in North America land, impacting both our drilling and completion businesses.”

Miller said customers are telling Halliburton that rig counts and completion jobs may be lower in the fourth quarter this year, compared to the same period a year ago.

“While holidays and potential weather impacts are the usual culprits, other drivers of this continued activity decline are our customers’ free cash flow generation commitments, an oversupplied gas market and concerns about oil demand softness in 2020.”

A flowing commitment

Oil and gas exploration and production companies based in Oklahoma continue to grapple with investors’ demands to boost cash flows.

Gulfport Energy, for example, stated its aim was to improve its cash flow when it announced it had completed a process to cut 13% of its employees and boost early retirement of its debts in November.

Chaparral Energy sold its corporate headquarters, cut about $8 million in debt, reduced the company’s corporate workforce by 23% and trimmed its capital expenditures plan with the same goal in mind

Devon Energy has concentrated hard on drilling and completing wells as efficiently as possible to boost cash flows.

Laredo Petroleum celebrated producing a positive cash flow in the third quarter of 2019, with officials adding it hoped to continue that trend.

Chesapeake Energy hopes to be generating free cash flow by next year.

And Energy Transfer’s $5.1 billion bid to acquire SemGroup, which shareholders approved this week, included positive cash flow considerations, while generating a return to shareholders also was the primary motivation behind a $1 billion deal Roan shareholders also approved this week that will take Roan private.

“Most public upstream companies have limited access to external capital and are dedicating their internal funds to production growth and capital returns to shareholders,” said Andrew Dittmar, a senior mergers and acquisitions analyst at Enverus, commenting on the Roan proposal.

Steve Agee, an economics professor who is the dean of the Meinders School of Business at Oklahoma City University, agreed this week that oil and gas company executives are working in a different world than they once did.

“The model we used to use in the industry was that CEOs got bonuses predicated on reserve or production growth, at the expense of return on equity,” Agee said.

“Now, investors take a dim view of that. They want a return on their equity, and that means cash liquidity. They want to see that, the same as they are getting it in other industries.”

Saturated gas

It has been nearly a year since natural gas sold at the Henry Hub was getting $4 or more per million British thermal units. Since January, the commodity hasn’t been fetching more than $3. During the summer, its value had fallen well under $3, and its most recent high-mark was set on Nov. 5 when the hub was selling the fuel for $2.86 per million British thermal units.

Supply and demand are key factors in its value. While natural gas usage has climbed across much of the nation as utilities have moved more toward using that fuel instead of coal to generate electricity, supplies have had no difficulty in keeping up.

A report published Nov. 22 by the U.S. Energy Information Administration showed there was about 3.6 trillion cubic feet in underground storage — within about 30 billion cubic feet of its running five-year average for that time of year.

While all that might suggest that the current oversupply of gas might continue for some time, Tony Say, president of Oklahoma City-based Clearwater Enterprises, observed this week he is more optimistic about the coming year than he was a year ago.

“We are significantly down from a drilling perspective, and we think that is going to impact the supply in the marketplace,” given that shale wells show rapid production declines over short periods of time.

He noted that more and more of the fuel is being used domestically to generate electricity, and also expressed hopes that eventual trade deals could open additional markets in Asia to U.S.-exported liquified natural gas, providing another outlet for the fuel.

“I am beginning to see a balance in the marketplace,” Say said. “When you put all the ingredients in the pie, it isn’t as pessimistic as some people might believe.”

Demand curve

One of the most dominant influences in exploration and production companies’ annual budgets is the ever-changing forecast on global oil demand.

During periods when demand climbs, the commodity’s price tends to increase and prompts companies to boost drilling and completion budgets and produce more crude to take advantage of those market conditions.

During periods when demand falls, its price tends to fall, forcing companies to cut their budgets as they attempt to control costs to maintain some sense of profitability.

Until about a decade ago, the Organization of Petroleum Countries controlled supply and demand fundamentals for crude, always aiming to keep the price high enough to keep them profitable but low enough to keep the global economy growing.

Once domestic producers perfected the process to extract oil from shale, however, U.S. production of crude climbed from about 5 million barrels daily to more than 12 million.

Since U.S. producers have been allowed to export crude oil, OPEC has found itself in a defensive battle, cutting its own output of product periodically to try to keep prices from falling too far.

The organization and Russia, in fact, were meeting last week to consider whether to keep current production restrictions in place, plus trying to get commitments from all of its members to honor whatever limits it decided to set.

Uncertainty about where crude oil prices ultimately are headed can be seen in the numbers of wells across the nation that have been drilled, but not completed.

In October, there were 7,642 wells that fell into that category, the U.S. Energy Information Administration reported. About 10% of those, its data showed, are in the Anadarko Basin.

Agee described drilled, uncompleted wells as cans of commodity sitting on companies’ shelves that they can wait to open when market prices improve.

As long as a well’s bore integrity remains sound, a well should produce as expected once it has been completed and moved to production, he explained.

“They are a different kind of animal,” Agee said.

And Agee said he doesn’t believe domestic oil and gas producers have reached the end of the road for their businesses, either.

He said energy demand globally continues to grow in Southeast Asia, China and Africa, and that the world still overwhelmingly uses hydrocarbons to meet those energy needs.

“These markets aren’t going to go away. We will see a return at some point to a more vibrant industry,” Agee said. “It is just going to take a while.”

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