Companies are dusting off contingency plans that may have seemed far-fetched when oil was trading above $100 a barrel in the summer. Oil-well and land portfolios are coming under renewed scrutiny as they decide where to wait it out and where to continue production.
Survival of the fittest is the term being used by investors and analysts as they try to figure out what’s next after the Organization of the Petroleum Exporting Countries last week decided to keep its production levels unchanged, sending crude futures down 10% on Friday.
Prices recovered some of those losses on Monday, with New York-traded oil closing at $69 a barrel after testing lows below $65 a barrel earlier in the session.
“We are on the edge of what people are comfortable with,” said Meredith Annex, an analyst with research firm Bloomberg New Energy Finance.
U.S. drilling is likely to continue if prices hold around $70 to $75 a barrel, she said. Below $65, however, companies will cut production and move away from the newer, less developed shale plays in the U.S., and even from the fringes of the more established shale areas like the Permian basin in Texas and North Dakota’s Bakken basin, she said. The U.S. would then import more crude until prices come back up again.
For more, see: Why cratering oil may not crush shale producers.
Analysts at Tudor Pickering Holt told investors to find shelter in “liquid names with high quality assets and healthy balance sheets that can weather the 2015 storm.”
Tudor and others are expecting oil prices to stabilize around $70 a barrel in the coming weeks or months. Last week’s steep decline was probably exaggerated by thin U.S. trading around Thursday’s Thanksgiving holiday, they said.
Tudor’s top five “safe harbor” names -- those likely to experience less of a negative impact on their drilling programs or production estimates -- are Anadarko Petroleum Corp. APC, +1.66% Devon Energy Corp. DVN, +1.15% EOG Resources Inc. EOG, +4.12% Marathon Oil Corp. MRO, +3.21% and Cimarex Energy Co. XEC, +1.54%
Energy is a cyclical business, and adjusting production to lower prices and lower demand is not uncommon — companies did exactly that in 2008 and 2009, when oil prices collapsed during the recession.
This year, however, companies were convinced in the spring and summer that prices would remain around $90 a barrel, said Reid Morrison, energy consultant with PwC.
U.S. companies are likely poring over their portfolios now to figure out which wells they can afford to shut down, to ditch, or even to sell.
Idling a well, from a purely technical viewpoint, is relatively easy. But it gets complicated when companies have to factor in the financing structure and tens of thousands of land leases, each carrying different obligations and time frames, said Morrison.
“Every exploration and production company is doing a detailed review of their leases and rationalizing their portfolio as we speak,” Morrison said. In some cases, selling the land lease might be the answer, he said.
Most oil companies were “in denial and are unprepared to endure a prolonged period of low oil prices,” said Fadel Gheit, analyst with Oppenheimer, in a note. “They will have to adjust to the low prices ... by slashing budgets, improving capital efficiency, and selling marginal assets.”
Most will have to borrow to pay their dividends, he said.
It will be survival of the fittest, analysts at Citigroup said in a note. For long-term investors, there’s the opportunity to benefit from the “near-term distress of energy producers and potentially add to positions as the price stress plays out,” said Citi.
Energy stocks mostly fell again on Monday, extending the Friday sell-off that mirrored the plunge in oil futures. So far this year, they are off 10%, making energy the worst performing sector in the S&P 500 Index SPX, +0.46% and the only one poised to end the year in the red. The S&P has gained 11% in the year to date.
For the moment, trying to call a bottom for oil prices is akin to the Wall Street axiom of catching a falling dagger, said analysts at The Schork Report.
“Therefore, pick your bottom at your own risk,” they wrote.
