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The list of oil and gas company combinations grew longer this week, with Canada-based Cenovus and Husky announcing an all-stock deal valued at $23.6 billion. In the U.S., the country’s largest natural gas producer revealed expansion plans of its own. In this week’s installment of hits and misses in oil and gas, Rigzone panelists provide insights on likely effects of these and other mergers and acquisitions (M&A). Keep reading for perspectives on M&A and other timely topics.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Phil Kangas, US Partner-in-Charge, Energy Advisory, Natural Resources and Mining, Grant Thornton LLP: While the oil industry has essentially been in “hunker-down” mode, M&A activity has begun to reset the industry landscape, as evidenced by recent megadeals. Upstream producers continued to scale back their capital investments and look to minimize costs from across their supply chain/vendor set. An ongoing theme in M&A activity continues to focus on pulling out general and administrative costs, drive efficiencies in operations and improve cash flow.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: Consolidation continued with Cenovus acquiring Husky, the largest Canadian oil and gas acquisition in five years. Larger entities should likely bring increased discipline to the sector as they target an investor base that benchmarks key metrics against cash flow returns available in other industries, as opposed to a call option on oil price.
Andrew Goldstein, President, Atlas Commodities LLC: West Texas Intermediate (WTI) crude oil broke out of the recent range to the downside with the potential of additional lockdowns, due to increased numbers in COVID-19 cases. We haven’t seen these lows since May of 2020. As the front month has come off as much as 12 percent this week, one year out on the curve has only come off only eight percent signifying that the sentiment is that in one year we will have less supply/demand concerns.
Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: Oil prices continued to slide further this week, mainly because of market sentiment that COVID will continue to keep demand down, and more oil from Libya is entering the market. I sound like a broken record, but producers will produce because some cash flow is better than no cash flow.
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Oil prices broke the key $35 support area for WTI this week as bearish signals outnumber any bullish sentiment and prices traded at the lowest levels since June. Meanwhile, Brent crude is struggling to stay above $37. Rising cases of the COVID-19 virus throughout Europe and the U.S. have caused great concern about declining demand as lockdowns are again occurring. Increasing inventory, a return of Gulf of Mexico (GOM) production and a stronger U.S. dollar added more downside momentum.
U.S. oil production returned to 11.1 million barrels per day (bpd) last week after the restoration of GOM production post-Hurricane Delta, which had reduced supply to 9.9 million bpd. This week, Hurricane Zeta took approximately two-thirds of the GOM production offline temporarily, one of very few price-supporting signals.
The U.S. Energy Information Administration’s Weekly Petroleum Status Report showed a gain of 4.3 million barrels last week, only the second increase in the past 14 weeks but the second in the last three. The American Petroleum Institute had forecasted an increase of 4.6 million barrels while S&P analysts called for a meager 200,000 addition. At 492 million barrels, inventories of crude are at nine percent above the five-year average. Refinery utilization increased to 74.6 percent. Total motor gasoline inventory declined 900,000 barrels but remain slightly above the five-year average. Distillate inventories fell by 4.5 million barrels but are at 17 percent above the five-year average as we enter the winter heating oil demand season. The key Cushing, Okla., hub saw a small decline of 400,000 barrels.
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Libyan oil production continues to increase and is expected to be at the 1 million-bpd level within a month. OPEC will meet at the end of November and will address the soft market conditions.
The U.S. stock market has been falling since the peaks earlier this month on the increasing coronavirus outbreaks. After nearing the 29,000 mark on Oct. 12, the Dow is now struggling to stay above 26,000. The S&P and NASDAQ are also both off their previous highs from this month.
The U.S. dollar has risen as investors exit equities, which has only served to suppress crude buying.
Meanwhile, natural gas holds strong on a lower-than-normal weekly storage withdrawal and lower production believed to be caused by shut-ins. Supply last week was 87 billion cubic feet per day (Bcfd) versus about 96 Bcfd a year ago.
Power and residential demand is up as parts of the U.S. are seeing some early cold and even snow. Stored natural gas volumes now stand at 3.955 trillion cubic feet (Tcf) after a small, 29-billion-cubic-foot injection last week. The surplus above the five-year average has been reduced to seven percent. The below-normal injections and the shrinking of the surplus have now diminished the prospects for starting the winter season with more than 4 Tcf in inventory, which would’ve been a record.
Rigzone: What were some market surprises?
Goldstein: Not much of a surprise, due to a pandemic-driven collapse in fuel demand, PBF Energy has idled operations at its Paulsboro, N.J., oil processing facility. They plan to lay off 250 employees and shutter the 160,000 barrel-per-day plant, halting fuel production as a result of low fuel demand.
Le Dain: The most recent hurricane of the season was a surprise to the market and residents. Impact to crude storage appears to be a wash, with Gulf production shut-ins balancing refineries that were forced to shut and are now reopening. Unfortunately the damage to residents appears significant in an already tough year.
Seng: The widespread severity of the coronavirus heading to lockdowns had to be a shock to the market as conditions are starting to look like they were back in March.
Kangas: Market leaders have shown the way. Of note is the $9.7 billion ConocoPhillips/Concho Resources bid, followed by Pioneer Natural Resources’ acquisition of rival Parsley Energy, in an all-stock deal valued at $7.6 billion. These substantive market developments may spark additional actions in the Permian Basin and elsewhere. One notable attribute of these deals is the premiums placed on these transactions, at 15 and 7.9 percent, respectively.
McNulty: I thought NYMEX Natural Gas would be much closer to $3.50 by now due to much colder weather across North America. Fundamentals point to a $3.50 to $3.65 range soon.
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