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Movement in crude oil prices and its impact on the US oil-gas players

The companies operating in the oil and gas industry have witnessed a roller-coaster ride during the past few years amidst the steep decline in international crude oil and natural gas prices. The two major global benchmarks for the oil prices, the US-based WTI and the UK-based Brent have witnessed a price decline of more than 60%. This was from the peak of nearly $100 per barrel in the mid-2014 to the intermittent lows of around $35 per barrel in the first half of 2016. One of the main rationales behind the fall of oil was the reluctance of the OPEC (Organization of the Petroleum Exporting Countries, the largest oil supplier group in the world) to cut down production as demand growth was seen peaking down. Additionally, this scenario of sluggish demand growth, rising production from the US-based shale producers, created an oversupply situation, that pushed added pressure on the oil prices. 

Source: Bloomberg and Televisory’s research 

During the last decade, the total supply of the US market has been met with a mix of domestic production and imports, mainly from the OPEC. The total supply from 2007 to 2016 has increased from 15.1 MBPD to 16.8 MBPD, this is as per the first half of 2016. However, a major change has come in the way imports and domestic production has moved. The internal production in the US has increased from around 5 MBPD in 2007 to around 9 MBPD (it peaked around 9.5 MBPD in  2015 of which  more than half is supplied by shale based plays). As local production increased at a sharp pace mainly owing to shale backed play, imports declined from over 10 MBPD in 2007 to the current rate of approx. 7.5 MBPD. This decline in the US imports of 2.5 MBPD was in addition to the weaker demand from other major economies, economic blocks such as China, Europe and Japan. In this period, the OPEC tried to reallocate its excessive supply and counter the shale boom in the US, it kept up its production levels knowing well its impact on the prices. The OPEC producers mainly relied on their low cost of production base against the shale producers. This approach considerably brought down oil prices while putting pressure on all oil producers, including shale gas-based producers.

Source: Bloomberg and Televisory’s research 

Further, the legal and logistical limitation on the export of shale gas and shale-based oil in the US created similar excess for gas supplies, which were increasing in the country. This pushed the gas prices down by nearly 50% before recovering in tandem with the oil prices.                  

The major oil and gas operators in the US during the last few years have seen a significant fall in oil and gas prices. This has effected revenues, profitability and operations of major producers. Televisory took 8 major players into account for the data study, which are operating in the US region and in the oil and gas play. As crude oil and natural gas prices fell, revenue for the companies in our group analysis fell by around 40% on an average in the year 2015, while 4 out of 8 players recorded a fall in revenues during the year 2013-14.

Source: Bloomberg, Televisory’s research 

As the realisations dropped, companies tried to cut core costs, which was reflective moderately through fall in the cost of goods sold. Nevertheless, fall in realisation as considerable and companies could not reduce its impact through lowering of costs. Thus, gross profit margins of the players tumbled from around 40% plus in the year 2011-13  to just over 15% in 2015. The companies having a mix of oil-gas production and sales have largely maintained their production output in the past 5 years. This is notwithstanding the fact that they have witnessed a sharp fall in the revenue/BOE from around $80 per BoE (Barrel of oil Equivalent) in 2011 to nearly $45 per BoE in 2015. 

Source: Bloomberg and Televisory’s research 

The fall in revenue due to lower prices, in turn, impacted EBITDA, which saw a huge decline particularly in the year 2015. The average EBITDA margin for the companies under the group fell from around 45-50% range in 2011-12 to almost 35% in 2014, this further tumbled down to minus 70% in 2015.

The worsening of EBITDA had its impact on the balance sheet, leverage ratios such as the debt to equity numbers and the DSCR also slipped for the companies examined. This had a direct bearing as Haynes and Boone, an international corporate law firm reported that around 90 oil and gas producers in North America have filed for bankruptcy since the beginning of 2015. Moreover, during August 2016 an additional 50 producers have filed for bankruptcy protection.

The expectation that supplies may curtail or at least the growth slows is further buoyed by early signs of China stabilising and other Asian countries maintaining healthy growth rates. The gradual improvement in the global macro environment might strengthen the oil prices in the coming quarters. In addition, another slow but long term factor having a bearing on oil is a steep decline in energy generation from renewables. However, the major supply-side drivers in the oil and gas markets would continue to exist. How and by what quantum the OPEC and US Shale players scale back or at least hold production from the current levels will be seen in the near future. 

 

Also Read:- Economic Viability of Wind Energy

 

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