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The U.S. energy industry squeezed between virus fears and OPEC price war

The U.S. energy industry squeezed between virus fears and OPEC price war

 

For the U.S. energy industry, the bleak start to 2020 turned increasingly dismal by mid-March. As coronavirus fears gutted global demand and a price war between Saudi Arabia and Russia flooded the market with production, the industry found itself facing the prospect of increased bankruptcies, anemic financial performance and widespread layoffs.

As the price of West Texas Intermediate crude slid toward $30 a barrel in mid-March, the U.S. faced the prospect that it’s new role as a net crude exporter might be short-lived. For the past few months, America exported more oil than it imported, but the worst price rout in almost three decades prompted speculation the U.S. production would fall by a million barrels a day. That would reduce exports below import levels, according to an analysis by Bloomberg NEF.

While producers struggled with the steep price declines, the coronavirus hit close to home. Organizers canceled CERAWeek in Houston, one of the country’s biggest oil and gas conferences, citing coronavirus concerns. The number of known coronavirus cases in the U.S. topped 3,600 by mid-March, and at least 66 people had died. CERAWeek typically draws more than 5,000 industry executives from more than 80 countries. Meanwhile, the far larger Offshore Technology Conference, which draws tens of thousands to the city each year, was postponed until late summer.

The price war that erupted between OPEC and Russia dealt another blow to U.S. shale drillers, many of whom were already struggling to break even when crude was much higher. The financial fallout has begun to show up on the balance sheets of some of the biggest independent producers. Occidental Petroleum, just six months after its $37 billion acquisition of Anadarko Petroleum, slashed its quarterly dividend for the first time in 30 years. Oxy said it was reducing the payout to 11 cents from 79 cents, and it lowered its capital spending budget by one-third. Occidental is still working to reduce the $38 billion in debt it took on to buy Anadarko. The one winner in Oxy’s struggle may be billionaire investor Warren Buffett, who put up $10 billion in financing in exchange for preferred stock that pays him $800 million a year regardless of commodity prices or company earnings. Buffett’s holding is now worth almost as much as the entire company.

Just days after Oxy’s announcement, another large independent, Marathon Oil, slashed its 2020 drilling budget by 20 percent, to $1.9 billion from $2.4 billion. The move came after Marathon’s 2019 profit fell by 56 percent from a year earlier.

Many other companies, from producers to service providers, have focused on controlling spending and improving profit margins rather than boosting production at all costs, but now many industry observers wonder if the sudden embrace of fiscal discipline has come too late.

It’s not just company budgets and share prices that have been battered. Yields on about $110 billion of energy company bonds slipped below a margin of 10 percent above Treasuries, a sign that the bonds are in distress and raising concerns that some companies may not be able to repay their debt.

The combination of low commodity prices and heavy debt is likely to trigger a wave of mergers, bankruptcies and lawsuits according to industry analysts and bankruptcy lawyers who specialize in oil and gas.

“We already had a number of U.S. shale producers that were very challenged because they didn’t have great balance sheets and were struggling,” Pearce W. Hammond, managing director for midstream equity research at Simmons Energy, told HartEnergy.com. “This just accelerates this process. It likely means several companies will go bankrupt.”

Some industry leaders are appealing to the Trump administration for help, such as low-interest loans, federal oil purchases to prop up prices, or even trade barriers or import quotas to help shield the domestic industry from the ravages of the global marketplace. But even many Republicans appeared reluctant to help an industry that’s producing at record levels. Critics wasted no time condemning the idea, and on social media derided the plan as a “shaleout.”

Things are looking only slightly better on the natural gas side of the equation. Shares of companies such as Cabot Oil & Gas, Southwestern Energy and Range Resources climbed in early March on the speculation that plunging crude prices will force operators in the Permian Basin to curtail oil production.

Because gas is still produced primarily as a byproduct of oil in the region, analysts predict that declining oil production will ease the natural gas glut that has pushed prices to a four-year low. The output from the Permian and other shale basins continues to rise, but at a slower pace.

However, with the coronavirus tamping down global demand, some international buyers are refusing U.S. shipments of liquefied natural gas, raising speculation that American gas exports, like oil, will slow.

President Trump, during a recent visit to India, tried to convince the Indian government to buy more LNG from U.S. producers, but it was a tough sell. Given the weak price environment, more global buyers are turning to the spot market, rather than locking themselves into long-term supply contracts. The reluctance to commit to long-term agreements comes as companies in the U.S. are bringing more than a dozen new LNG export facilities online.

Just days after Trump’s visit, for example, federal regulators in the U.S. gave permission for a second dock at Freeport LNG’s export terminal in Brazoria County, Texas, south of Houston. The new permit will allow for increased tanker activity at the facility, which sent out its first shipment in December and which has plans to build a total of three production units with a combined output of 15 million metric tons a year.

U.S. exporters like Freeport need long-term agreements in advance to secure the billions needed to fund the projects. Thanks to the fracking boom, the U.S. is about to become the world’s third-largest gas exporter, but a global oversupply of gas from Qatar, Russia and Australia has kept prices low and left U.S. exporters scrambling to secure buyers.    

The plunge in oil and natural gas prices hasn’t slowed the country’s ongoing shift away from coal-fired electricity plants. The U.S. Energy Information Administration reported that coal use plunged 13 percent last year, a decline that’s likely to be repeated in 2020. That’s the biggest in 65 years. Coal producers have struggled to compete with cheap natural gas and growing pressure over climate change.

With Saudi Arabia indicating in mid-March that it would boost production, and Russia vowing to do the same, things aren’t likely to improve for U.S. producers any time soon. In Texas — which, as the biggest oil-producing state is the most sensitive to the boom-bust cycle — some industry participants are saying 2020 is starting to look like 1986, when the Saudis flooded the market with crude, sending the industry into a tailspin from which it didn’t recover for 15 years.

While U.S. production continues to rise, at least for now, the country remains the biggest producer and consumer of oil. But after four decades of scarcity and reliance on foreign imports, America is finding that abundance and energy independence bring their own set of perils.

Published: 06-04-2020

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