Iran deal may prolong pain for US independents

OREANDA-NEWS. July 15, 2015. The December timeline for lifting oil export restrictions on Iran could be particularly damaging for US independent oil producers that had been banking on a recovery in crude prices next year.

Most US producers so far weathered the lower crude prices of the past year by hunkering down, lowering spending, selling non-core assets, and drilling only in areas that offer the best returns. Some raised funds by selling more equity and debt. They have also benefited from a 25pc-30pc fall in costs as service providers lowered costs for rigs and crews to retain market share.

A growing number of US firms have even said they are planning to ramp up oil production on expectations that the slowdown in drilling will slow output growth in the second half of the year, soaking up much of the supply overhang.

But if Iran begins a surge of crude exports mid-December, as the deal reached between it and the P5+1 nations today could allow, it may mean sustained weakness in prices going into 2016. That will be far harder for US producers to cope with than the plunge since mid-2014 that saw oil drop to near six-year lows.

Iranian crude exports have been limited to 1mn-1.1mn b/d, reduced by more than half the level sent to markets before the sanctions took effect in 2012. But oil minister Bijan Namdar Zanganeh insists Tehran will be able to quickly return to its pre-sanctions position. Within one month of sanctions relief Iran will be able to add 500,000 b/d to its output — which currently stands at 2.85mn b/d, he said. An additional 500,000 b/d will be brought online within six to seven months. Iran may also use the 20mn-40mn bl of crude and condensate it keeps in floating storage to vie for market share after sanctions are rolled back.

Even before the Iran deal, US bank Goldman Sachs had forecast a prolonged weakness in oil prices. It attributed a decade of investment in new capacity, a strong dollar and an initiative by China to temper economic expansion to achieve balanced growth as they key factors. The bank expects October WTI to fall to \\$45/bl.

That means cash inflows from the oil they produce and sell will remain low for an industry that saw almost all explorers post net losses in the first quarter and key metrics such as debt-to-capital ratios worsening.

Moody's Investors Service in May warned that if oil prices move lower, more and more oil and gas companies may see their credit ratings downgraded.

Earlier this year, the independents also raised billions of dollars by selling equity and debt at levels not seen since at least 2009. Key among them include Laredo Petroleum, which raised \\$760mn, while Antero Resources raised \\$485mn and Oasis Petroleum \\$409mn. Making matters worse, many medium- to small-sized producers such as Devon and Oasis Petroleum have their hedges rolling off, starting later this year. Hedges had in part helped them secure funding from lenders as it ensured steady revenue inflow in a volatile market.

Yet, the Iran deal also brings clarity on the global supply outlook and "signals the end of supply shocks," Roger Read at Wells Fargo said. "With the exception of Libya's offline oil, there are no other significant non-producing easily available barrels globally." That may give producers a better handle to prepare their budgets and operations.