US oil and gas 1Q earnings may be ugly

OREANDA-NEWS. April 27, 2016. US independent producers' first-quarter losses will likely be greater than those seen a year ago, as they navigated the lowest oil prices in a decade by further reducing drilling to limit spending and preserve cash.

But with crude prices holding near \\$40/bl, the first quarter could be the trough in the market downturn that started in mid-2014. The near 70pc fall in oil prices since mid-2014 prompted some producers to cut their 2016 spending by as much as 80pc compared with 2015. Many have filed for bankruptcy, skipped interest payments or swapped their unsecured debt with higher interest bearing secured debt.

Ratings agency Moody's Investors Service says 39 of the oil and gas firms that it covers have defaulted on loans since the start of 2015, compared with 10 during the previous market downturn in 2008-09.

"Earnings will be abysmal for all US oil companies in the first-quarter reporting season, the lowest quarter for oil prices in over a decade, since the first quarter of 2004," US consultancy Wolfe Research says. January-March "was clearly a cyclical low", it says.

A slowdown in mergers and acquisitions (M&A) activity isn't helping US independents' finances either. Oil prices rebounded slightly in the first quarter from their lowest level in the current downturn — below \\$30/bl — to \\$40/bl, making it difficult for buyers and sellers to value assets. There were 39 oil and gas deals in January-March, unchanged from a year earlier, accountancy firm PwC says. The total value of the transactions fell by 19pc to \\$28bn.

Among the first quarter deals, Anadarko Petroleum sold \\$1.3bn of assets, including its Springfield Pipeline midstream system in south Texas for \\$750mn and its interest in the East Chalk area of Texas for \\$105mn. WPX Energy sold its natural gas assets in Colorado's Piceance basin for \\$910mn, while Chesapeake Energy closed or had agreements in place to sell about \\$700mn in assets by the end of February.

Financial investors accounted for "a modest" 10 deals, down from 14 the previous quarter, but higher oil prices may renew private equity interest. This may help companies such as Chesapeake and Devon Energy which are looking to raise more capital from asset sales, US bank Tudor Holt Pickering says.

The US drilling rig count on 1 April was down by 77pc compared with its peak in September 2014 and at its lowest level since 1987, when US oil service firm Baker Hughes began publishing data. US crude production should fall from 9.1mn b/d in the first quarter of 2016 to 7.9mn b/d in the third quarter of 2017, US government agency the EIA says in its latest Short-Term Energy Outlook.

But the heavy clampdown in spending and drilling activity may mean that the first quarter marks the bottom of the downturn in terms of profitability. Although more small to medium-sized producers may file for bankruptcy protection, larger companies are maintaining a tighter focus on capital discipline over production growth until they see a sustained recovery in prices.

"We will probably see \\$50/bl by the end of this year or sometime in the first half of next year," Pioneer Natural Resources chief executive Scott Sheffield says.

Firms have applied for over 2,300 drilling permits in Texas since 1 January, state oil and gas regulator the Railroad Commission of Texassays. The total is down by 35pc on the year, but operators may be building an inventory of permits in anticipation of an eventual price recovery, US research firm Pira Energy says.