‘Pain is coming’ for E&P sector: panelists
By Markham Watson
Natural gas prices, few — if any — exploration-and production companies make money, and more than 100 bankruptcies are likely if prices continue as projected, University of Texas Energy Week panelists said Friday.
“The E&P industry is broken right now,” said Kirk Goehring, manager of corporate development at Jones Energy, an independent oil and gas company based in Austin, Texas. “There’s maybe a handful of companies that can make money. … It’s difficult at these prices, there’s no doubt.”
Goehring was one of five panelists on the topic, “Oil & gas limbo: How low can prices go?” He said that “2015 was not as painful as people thought it would be, but I think the pain is coming.”
Another panelist, Arthur Berman, a director and geological consultant at Labyrinth Consulting Services in Sugar Land, Texas, said, “The reality is, if you actually balance your cost and the price, almost everybody was losing money at $90/b, and everybody is losing money at $30/b.”
A large number of E&P companies are relying on debt to maintain current operations, Berman said, which is unsustainable.
1 out of 3 firms at risk of bankruptcy
“It wouldn’t surprise me if up to a third or more of E&P companies go bankrupt,” Berman said.
Another panelist, Xuan Si, an equity analyst at Arete Investments, said he has heard estimates of as many as 150 E&P companies going bankrupt over the near term.
A recent report from Deloitte estimated that “about 175 companies are in the high-risk quadrant” for bankruptcy, as they have high leverage and low debt-service coverage ratios.
Peter Nance, managing director at Austin, Texas-based Que Advisors, cited a report from Rystad Energy, of Oslo, Norway, which listed the estimated cost to produce oil at wells in 20 major oil-producing countries, which showed the US cost at $36.20/b, and the cost of about half of the nations above Friday’s NYMEX March WTI crude settlement price of about $29.65/b.
Si acknowledged that current futures contracts for the period of five years into the future were in the range of $40/b to $50/b, but cautioned that the lack of liquidity in those contracts diminishes the likelihood that these prices represent the market’s collective wisdom on oil prices.
“If we think about predictive markets and about where the collective wisdom is, E&P equity markets are reflective of your long-dated objectives,” Si said.
To break even with an equity investment, depending on the company, oil prices would need to be in the range of $50/b to $60/b “to justify current values,” Si said.
‘Enormous overhang’ depressing prices: Nance
Que Advisors’ Nance said near-term oil prices are depressed by “an enormous overhang” in storage, but public filings by companies indicate that five years into the future, prices in the range of $45/b to $60/b.
When the moderator, Sheridan Titman, director of UT’s Energy Management and Innovation Center, suggested that Nance thinks oil prices are likely to be in the $50/b in five years, Nance smiled and said,“I think they’re likely to hit $20 before they hit $50.”
In contrast, Berman said he thinks that the current crash in E&P investment is likely to cut production sharply, which is likely to result in prices in the range of $60/b over the next two years.
“We’re going to end up with a supply deficit,” Berman said. “I think there will be huge volatility.”