BRIEFCASE sees the oil price recovering slowly during late 2009, following the first annual contraction of global oil consumption since 1982.
BRIEFCASE sees the oil price recovering slowly during late 2009, following the first annual contraction of global oil consumption since 1982.
OPEC is likely to crank-up stalled production capacity to meet recovering demand in 2010. However, spending on new production capacity will be slow to recover, as banks and oil companies marshal funds and repair balance sheets. Over the first half of 2009, the oil price should trade within a range of $US30 to $US55/barrel, but falling seasonal demand in April-May will put additional short-term downward pressure on price.
Market stability during the second half of 2009 could lead to a recovery to $US60/bbl, but further gains will depend on OPEC's production quota discipline and the rate at which oil demand recovers. By 2011, physical shortages of oil will reappear and the oil price should once again trade well above $US100/bbl.
Briefcase expects that OPEC will cut production by at least a further 500,000 barrels of oil per day during the March quarter of 2009 to ensure effective supply-demand balance, but the oil price remains vulnerable to further weakness until mid-2009, under pressure from growing inventories of non-OPEC oil.
The oil price has recently proved to be unmoved by freezing weather conditions in North America and Europe or by political and social unrest in the Middle East and Nigeria. Over coming months, a plunge in price below $US30/bbl is possible as the market responds to poor economic data. By the December quarter 2009, the market will be much more stable, with declining non-OPEC oil production starting to reduce global inventories.
Global world oil and condensate (liquid hydrocarbon) consumption increased by about 1 million barrels of oil a day (mmBOPD) each year during 2006 and 2007, following a rise of about 1.6 mmBOPD in 2005. Currently, global oil consumption is estimated to be running at just over 85 mmBOPD, under the influence of the Northern Hemisphere's winter peak demand period. OPEC forecasts that total demand will have risen by over 500,000 barrels a day to 86.5 mmBOPD during 2008, while the International Energy Agency's numbers point to a small fall in global usage during 2008.
Briefcase expects that oil consumption in OECD nations will continue to decline during 2009. Meanwhile, non-OECD countries have maintained a fairly steady annual consumption growth rate over the past four years of around 1.4 mmBOPD. This rate is also likely to come under pressure in 2009, as global industrial production declines. Briefcase judges that a net oil consumption decline of between one and 1.4 mmBOPD appears likely during 2009.
OPEC's recent production quota cuts of 2 mmBOPD should filter through to the market by March 2009, after which demand also falls seasonally by about 1.4 mmBOPD during the northern spring and early summer period. There's likely to be some expansion in non-OPEC supply from projects already committed and under way. Inventories of oil in the US Gulf Coast storage system are running at close to capacity levels, despite weak local production, which is yet to fully recover from hurricane damage.
Briefcase predicts that a rapid decline in oilfield development drilling in many parts of the world will begin to be felt into the second half of 2009, resulting in stable and then falling non-OPEC oil production. By late 2009, net global oil production from both OPEC and non-OPEC sources should be firmly in retreat, bringing the market into balance and stabilising the oil price.
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Oil companies can be roughly grouped into five categories:
- those with secure production and ongoing operating cash flow;
- those with developing production whose cash flow may not meet ongoing requirements;
- those with small operating cash flow and exploration interests;
- those with pure exploration interests; and
- coal seam gas (CSG) developers.
The key ingredient in each category is access to financial support in the form of cash balance, operating cash flow or existing credit facilities.
Category 1 includes stocks such as Woodside, Santos, Beach, Oil Search, Cooper, Stuart, Roc Oil, Tap Oil, AWE, Petsec, Amadeus, Carnarvon, Incremental, Salinas, Mosaic, Pan Pacific and NZOG.
These companies have an ability to cut costs and delay expenditure on exploration and new project development while maintaining enough cash flow to service financial commitments to lenders. Roc Oil can delay its Gippsland Basin and Chinese projects. Cooper Basin producers can get by with a $15/bbl operating margin on its production, but don't expect spending on exploration until the price of oil recovers.
Producers in the Gulf of Mexico will also cut back on development and exploration spending, tighten budgets and live off their established cash flow. Gas producers in Australia will be less affected, since there's little impact on domestic gas from weaker oil prices. Incremental and Otto look set to push ahead with their proposed 7-10 million cubic feet per day gas project in Turkey, where high gas prices should ensure the establishment of a sustaining cash flow by 2010, but progress towards development is painfully slow so far. Pan Pacific and NZOG are in a strong position with cash flow and net cash in the bank.
Category 2 companies face significant challenges to survive, since many have large financial commitments. Included in this group are Horizon, AED, Cue, Otto, Nido, Nexus, Strike, Vicpet, Impress, Po Valley, Marion and Golden Gate.
Horizon and Cue face a huge hurdle at the Maari oilfield development, where capital costs will end up being almost double initial estimates. Nido and Otto are in a similar bind at their Galoc project, which has been plagued by operational stuff ups. At the current oil price, these projects will be run for the benefit of the project's bankers, with nothing left for investors. Nexus's Longtom project will feel little impact from weaker oil prices, since it is a gas project with fixed (if low) gas prices, expected to generate an Ebitda of $75 million a year for the company from the December quarter this year. The company's Crux condensate stripping project will not proceed at current oil prices and Briefcase expects that the project will go into semi hibernation, with minimal planning work but no serious financial commitments until a higher oil price can be locked in. Given that Nexus must recover its condensate before 2020, the clock is ticking and value will drain away as the project life is squeezed from the front by a low oil price and at the back-end by an eventual hand over of the permit to Shell in 2020. Strike Oil and Golden Gate can both tread water with their existing cash flow and survive, while Marion looks vulnerable with ongoing delays to its gas production, low prices in the US and high costs.
Vicpet and Bow Energy have a lot of capital to spend on their CSG projects, but VicPet has a supportive shareholder, cash in the bank and small cash flow from its Cooper oilfields. Briefcase expects that many of these companies will merge or die during 2009.
Category 3 companies include Sun, FAR, Oilex, Adelphi, Elixir, Norwest, Antares, Buccaneer, Drillsearch, Innamincka, Sundance Energy, Texon, Buru and others.
Survival here depends on access to cash by each company and their ability to cut costs so that they can live within their means. The group contains many members who will not survive and, like their cousins in Category 2, many will end up on the chopping board with individual assets or the whole company up for grabs. Innamincka looks secure, even though its Flax, tight oil development project has been rendered uncommercial at current oil prices. The key here is to select management with corporate experience and technical savvy, but even that will provide no guarantee of success.
Category 4 includes most of the other companies and is the saddest group, unless like Global Petroleum or Odin Energy, they have cash. Others include Transerv, which is in need of working capital, and Samson.
Category 5 is a fast-shrinking group where merger activity has been rampant. Those left include Molopo, which must feel like a wallflower and Orion, which may hold some excitement for its NSW projects. Others are crowding in, including Bow, Vicpet, Mosaic and Innamincka, but the business model requires huge dollops of equity for at least five years before any sort of free cash flow can be generated and relies on access to global markets for the product gas, since domestic gas prices will be kept low by a medium-term oversupply.
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n Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au
