I read that article earlier this morning… very interesting.
^ I’m in big 4 valuation, oil and gas specifically, and seeing some interesting stuff.
To be honest, that article reads as though its written by an accountant. Any company in the business doesn’t look at things that way, on the ground in reality. Their cash flow models have realistic pricing assumptions that drive decision making. No one at Devon (one of the examples given) is using $95 crude to determine whether to turn on or off a well. Lenders know this too. Banks working with these guys know their 12 month EBITDA forecasts and are monitoring coverage. There will be reserve writedowns, but this is known already. There is no surprise here. Just an accountant getting all excited.
It’s really not that big of a deal. People know how reserves are stated with the SEC and that its backward looking with the pricing. Analysts will see those reserve numbers, F&D costs and pay them little attention b/c they know they are inconsistent with reality. If anyone was buying these E&P’s based on the PV-10 number in their filings they deserve to lose money. Write-downs on proven reserves will happen at the end of this year; it’s just delaying the inevitable unless we get a large price shock to the upside soon. There’s no real scandal here and I think market valuations have adjusted. You can’t really buy these E&P’s based on book value, PV-10 figures b/c they are overstated.
IMO it sounds like a staff writter called up his/her buddies at KPMG and used loose logic to make a scary title in order to drive article views.
Any (decent) accountant knows non-cash charges to the income statement via write-downs aren’t the issue to be concerned with at the moment.
^ Ouch. I hold some high yield small cap energy debt right now thats giving me the jitters. I’m earning a nice 12% yield across the three firms, but it may be getting time to close out the position. I’m not worried about solvency with my three, but I’m very concerned about their ability to refinance in this environment, maturities are all before Dec31/15.
Just some guy on the internet’s opinion here, but it’s all about the acreage. American Eagle’s Bakken acreage is very poor – it’s basically just a long-term speculative call option on oil prices with a strike around $70-75/bbl on WTI. Not too surprising on them. There are others (Emerald) in North Dakota/Montana that have similar issues.
I’ve paid some attention to the high yield, E&Ps in the Permian (West Texas) in the B-/B3-ish range – all have the same credit ratings, but their debt trades on the strength of their acreage positions (in my opinion). They all have leveraged balance sheets, but some have good acreage and others have mediocre positions – the ones with less attractive positions really sold off hard in December and good acreage holders debt pricing was surprisingly quite resilient. Pretty material differences in pricing.
Geo, if you like their acreage positions you may be alright – if they are on the fringes of some attractive fields they may have some issues. You’re knowledgable so you may not need it, but good luck!
I was amazed to see Energy XXI manage to sell nearly $1.5 billion in debt this week at 11% in a zero interest rate environment. Their market cap is a big under $500 million, just for comparison. This environment is just…ugh. I don’t even know anymore. My company is currently forecasting another dip in WTI prices in the short term before summer driving season takes off and refinery downtime clears up, but if storage continues to build… also another wildcard is the USW strike that’s now in month 2 or 3. The big refineries are all still operating with managers and replacements, but if any of their utilization takes a big drop for some reason, that’s high 6, probably into 7 figures a day in throughput that is in jeopardy.
It was an increase from 1.25 bil. I take it as a positive instead of a negative.
Their hurdle rate must be enormous.
I’m sorry if this is a dumb question, but many of these E&P’s in North America have a material amount of their 1H 2015 crude oil production hedged. Who are the parties on the other side of these hedges? They’ve got to be getting crushed right now.
3 months later, we’re starting to see the impact of lower oil prices and a lower dollar.
Ontario created 60K full-time jobs last month. I know these numbers are volatile but that is a staggering amount of full-time jobs for one month. Quebec for a second straight month has positive employment numbers.
On the other hand, resource intensive regions are bleeding and it looks like the worst is still to come. Behind every job loss there is a human story so I don’t want this to be perceived as gloating.
Airlines, refiners, utilities, petrochems.
Its certainly a tougher market out here now (I’m not in oil and gas) but its certainly not a recession/depression. Unemployment rates in Alberta are still much lower than Central and Eastern Canada (especially when you look at employment rates, there is actually no comparison, 70% employed in AB versus 60% in QC, even after these layoffs/growth). Again, its a matter of things being less hot than things being cold. If these pricing levels continue into Q3/Q4, then I think things start to get much more difficult. Alberta remains the best place in Canada to make a living and grow your wealth.
new lows for oil prices. as i’ve said from the start, this will get nasty for the west. 1986 redux.
Yea buddy, lets see what all the speculators do now.
Let’s hope not.
Yeah and output and above ground supply continues to grow. Problem just continues to get worse as these marginal producers continue to ramp supply.
Crappy feedback loop
Not only supply, but storage unless thats what you meant by above ground