Analysis: Crude price drop ill-timed for US indies

OREANDA-NEWS. July 10, 2015. A 16pc drop in benchmark US crude futures since the 2015 peak in May comes at an awkward time for many independents who were setting their sights, and their budgets, on a recovery.

Prior to this week, WTI futures had risen by 31pc from their near six-year settlement low of \\$43.46/bl on 17 March. That had spurred a small but growing club of producers such as Occidental, Devon, Chesapeake and WPX to raise their 2015 output guidance, in part by starting to clear a backlog of wells that were drilled but not completed. Now, with both Nymex WTI and Brent dipping to their weakest since mid-April, the possibility of more companies announcing revised growth targets look unlikely.

"A quick recovery in prices seems some way off, and the danger is that there could be more downside before any recovery starts to take effect," UK bank Barclays said. "Strong commodity investment growth in the first half of 2015 — shaping up to be the strongest period of growth in four years — now appears to be at risk."

Crude markets had risen some 40pc from the near six-year lows touched earlier in the year and held within a tight range amid expectations that the fall would make fuels such as gasoline and diesel more affordable in emerging nations, reviving demand.

But crude futures plunged this week after voters in Greece rejected a debt bailout at the same time that Iran and world powers headed closer to a nuclear deal.

The Nymex light, sweet futures contract settled lower by \\$4.40/bl and Ice Brent settled down by \\$5.53/bl on 6 July. WTI slid another 20?/bl yesterday to settle at \\$52.33/bl, while Brent moved slightly higher to \\$56.85/bl.

Most US independent producers were looking at an average WTI price of \\$60/bl for 2015 while finalizing their plans to step up activity. But the latest pullback may mean that the average could stay far lower. That may mean the nascent revival in US rig count could soon lose its momentum.

Weak prices could hurt medium- to small-sized oil and gas producers such as Devon, Oasis Petroleum and EP Energy because many of their hedges will start to roll off later this year. The cushion from hedges have in part helped them secure funding from lenders to boost liquidity as cash flows get squeezed because of lower oil prices.

A persistently weak market may also make it harder for smaller producers to service their debt, raising the potential for more bankruptcies. Saratoga Resources filed for Chapter 11 bankruptcy protection last month, becoming the latest US independent producer to buckle under pressure, joining companies like Quicksilver Resources, Dune Energy and American Eagle Energy.

Moody's Investors Service in May warned that falling crude prices could spur credit downgrades. A default-forecasting model estimates that oil and gas companies with B2 rating or below may see an increase in the default rate from 2.7pc currently to 7.4pc in the next year. A B2 rating is just two steps above default. As of 1 May, oil and gas comprised 15pc of all those rated B3 or lower — the largest for any industry across the US corporate sector and nearly double last year's level of 8pc.

The US Energy Information Administration said that the steep fall in crude prices was unusual, but noted that despite daily volatility, monthly Brent prices have averaged \\$55-\\$65/bl since falling to \\$48/bl in January.

Projected 2015 oil prices remain high enough to support continued drilling in the core areas of the Bakken, Eagle Ford, Niobrara, and Permian basins, the EIA said.