ValueScope’s Energy Update: January 2020

Key Themes for Energy in 2020

Following are excerpts of some of the key energy “themes” for the US in 2020, taken from a recent CreditSuisse energy research report [1]:

  • E&P companies are evolving from growth-oriented to more capital disciplined and free cash flow generating entities; [2]

Valuescope'S Energy Update: January 2020

  • Utilities will continue to transform into a lower-carbon and higher tech industry as renewable power without fuel costs and grid modernization drive earnings growth with less customer burden;
  • Alternative Energy and Renewables to see new business models emerging around batteries as costs decline and customer adoption rates tick up;
  • Oil prices for WTI/Brent are forecast with average prices per barrel of $55 and $63, respectively;
  • Natural Gas prices are forecast to average $2.50/MMBtu;
  • Royalty Minerals expect further consolidations in 2020. Large-scale transactions could pick up from private equity-backed mineral entities, looking to exit either by coming to the public market, or being consolidated by one of the existing publics.
  • Oilfield Services are expected to face continued headwinds from E&P capital discipline and efficiency gains.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on January 16, 2020, as well as the predicted crude oil prices based on option and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Valuescope'S Energy Update: January 2020

Based on January 16, 2020 prices, the markets indicate that in mid-February 2020 there is a 68% chance that oil prices will be between $53.50 and $62.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $47.50 and $69.00.  By mid-September 2020, the one standard deviation (1σ) price range is $45.00 to $68.00 per barrel, and the two-standard deviation (2σ) range is $33.00 to $80.00 per barrel.  In other words, there is a 95% probability that the expected price of oil will be between approximately $33 and $80 per barrel, and a 97.5% probability it will not be above $80 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.14 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-February  2020, the one standard deviation (1σ) price range is $1.85 to $2.40 per barrel (68% probability) and the two standard deviation (2σ) range is $1.60 to $2.85 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certain outcomes—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $80 by mid-September 2020, so I wouldn’t count on it.”

[1] Energy in 2020: Evolving,” December 19, 2019, CreditSuisse Equity Research report.  Equity Research Global

[2] Image downloaded and modified from CreativeCommons.org, credit to Fabius Maximus website.

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Brad R. Currey, CEIV, CFA

DIRECTOR – ENERGY PRACTICE LEADER
bcurrey@valuescopeinc.com
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ValueScope’s Energy Update: December 2019

U.S. Oil Companies Impending Debt Crisis

The oil price crash of 2015 and 2016 naturally led to numerous financial difficulties for many oil companies.  Following a partial rebounding of prices, oil companies rushed to produce by borrowing significantly.  This has led to a “debt wall” with scheduled maturities rising sharply over the next few years.[1]

Valuescope'S Energy Update: December 2019

Many companies will have difficulty paying off these large debt burdens, barring a dramatic increase in oil prices.  Bankruptcy filings have increased substantially this year, with 33 filings as of September 30, 2019, relative to 28 all of last year.[2]  As the debt burden increases, this number is likely to grow.

Chesapeake Energy Corporation (CHK) announced in early November that there was “substantial doubt” regarding its ability to remain a going concern.[3]  Recently CHK received a written notice from the New York Stock Exchange regarding its noncompliance with the requirement to maintain an average closing share price of $1.00 over a consecutive 30 trading-day period.[4]

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on December 16, 2019, as well as the predicted crude oil prices based on option and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Valuescope'S Energy Update: December 2019

Based on December 16, 2019 prices, the markets indicate that in mid-January 2020 there is a 68% chance that oil prices will be between $55.00 and $64.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $48.50 and $70.50.  By mid-May 2020, the one standard deviation (1σ) price range is $49.00 to $68.00 per barrel, and the two standard deviation (2σ) range is $38.00 to $83.00 per barrel.  In other words, there is a 95% probability that the expected price of oil will be between approximately $38 and $83 per barrel, and a 97.5% probability it will not be above $83 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.36 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-January 2019, the one standard deviation (1σ) price range is $2.00 to $3.00 per barrel (68% probability) and the two standard deviation (2σ) range is $1.65 to $4.80 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certain outcomes—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $83 by mid-May 2020, so I wouldn’t count on it.”

[1] Gladstone, Alexander, “U.S. Oil Patch Stares Down $120 Billion Debt Wall,” The Wall Street Journal, December 3, 2019; https://www.wsj.com/articles/u-s-oil-patch-stares-down-120-billion-debt-wall-11575412192.

[2] Oil Patch Bankruptcy Monitor, Haynes and Boone, LLP, September 30, 2019.

[3] Scurria, Andrew, Alexander Gladstone and Carlo Martuscelli, “Chesapeake Warns On Risk To Business From Sagging Oil Prices,” The Wall Street Journal, November 5, 2019, https://www.wsj.com/articles/chesapeake-warns-on-risk-to-business-from-sagging-oil-prices-11572972005.

[4] Sylvester, Brad, “Chesapeake Energy Corporation Receives Continued Listing Notice From NYSE,” ENP Newswire, December 16, 2019.

For more information, contact:

Brad R. Currey, CEIV, CFA

DIRECTOR – ENERGY PRACTICE LEADER
bcurrey@valuescopeinc.com
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Geriatric DUCs: “I’m Not Dead Yet!”

Geriatric DUCs: “I’m Not Dead Yet!”

Investors and operators are now required to consider a portfolio of aging wells that have been drilled, but uncompleted (“DUCs”).  Delaying a completion of a previously drilled well, by as many as four years, has “little effect” on the initial production level, according to a new study by US Energy Information Administration (EIA).

The study tested the assumption that long-delayed completions mean a well is not worth the cost. [1]  “Some people say you cannot fracture a well drilled more than a year ago,” but the data says otherwise, said Jozef Lieskovsky, a senior analyst for the EIA who co-authored the report. [2]

Geriatric Ducs: &Quot;I'M Not Dead Yet!&Quot;

Most of the wells were completed in 2018 and 2019, so the fracturing technology used was of the same era, Lieskovsky said.  What the EIA found was that the average initial production for the oldest wells (3-4 years old) peaked at a slightly higher level than the youngest ones (1-2 years old).  However, over time it appears the wells in the 1-2 year group slightly outperformed the older ones.  

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on November 15, 2019, as well as the predicted crude oil prices based on option and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Geriatric Ducs: &Quot;I'M Not Dead Yet!&Quot;

Based on November 15, 2019 prices, the markets indicate that in mid-December there is a 68% chance that oil prices will be between $52.00 and $62.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $45.00 and $70.50.  By mid-March 2020, the one standard deviation (2σ) price range is $47.00 to $66.50 per barrel, and the two standard deviation (2σ) range is $36.50 to $80.00 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $36 and $80 per barrel, and a 97.5% probability it will not be above $80 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.66 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-December 2019, the one standard deviation (1σ) price range is $2.30 to $3.50 per barrel (68% probability) and the two standard deviation (2σ) range is $1.90 to $5.00 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certain outcomes—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $80 by mid-March 2020, so I wouldn’t count on it.” 

[1] Journal of Petroleum Technology (JPT), Stephen Rassenfoss, September 11, 2019; https://pubs.spe.org/en/jpt/jpt-article-detail/?art=5944

[2] U.S. Energy Information Administration, September 10, 2019, “Time between drilling and first production has little effect on oil well production”; https://www.eia.gov/todayinenergy/detail.php?id=41253&src=email

For more information, contact:

Brad R. Currey, CEIV, CFA

DIRECTOR – ENERGY PRACTICE LEADER
bcurrey@valuescopeinc.com
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Remember that Little Bombing Incident in Saudi Arabia?

Remember that Little Bombing Incident in Saudi Arabia?

Last month, two of Saudi Aramco’s oil production plants were attacked with a combination of twenty-five drones and missiles.  The sites hit, the Abqaiq and Khurais oil facilities, impacted Saudi production by 5.7 million barrels per day of crude [1].

This disruption in supply caused Brent Crude Oil prices to spike approximately 20%, given that this was the biggest one-day disruption to global oil output in history [2].

Remember That Little Bombing Incident In Saudi Arabia?

However, this spike in Brent Crude prices, as well as in the corresponding West Texas Intermediate indices, was short-lived.

Remember That Little Bombing Incident In Saudi Arabia?

Given the significant current supply of oil production, prices have returned to their level before the strike, essentially eliminating its impact on global crude pricing.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on October 15, 2019 and predicted crude oil prices based on option and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Remember That Little Bombing Incident In Saudi Arabia?

Based on the October 15, 2019 prices, the markets indicate that in mid-November there is a 68% chance that oil prices will be between $47.50 and $59.50 per barrel.  Likewise, there is about a 95% chance that prices will be between $40.50 and $72.50.  In mid-February 2020, the +/- 1σ price range is $43.50 to $65.00 per barrel, and the 2σ range is $32.50 to $85.00 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $32 and $85 per barrel and a 97.5% probability it will not be above $85 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.35 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-November 2019, the +/- 1σ price range is $2.15 to $3.15 per barrel (68% probability) and the +/- 2σ range is $1.75 to $4.40 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certain outcomes—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $85 by mid-February 2020, so I wouldn’t count on it.”

 

[1] CNBC, “Saudi Aramco reveals attack damage at oil production plants,” September 20, 2019, https://www.cnbc.com/2019/09/20/oil-drone-attack-damage-revealed-at-saudi-aramco-facility.html

[2] BBC News, “Oil prices soar after attacks on Saudi facilities,” 17 September 2019, https://www.bbc.com/news/business-49710820v

For more information, contact:

Brad R. Currey, CEIV, CFA

DIRECTOR – ENERGY PRACTICE LEADER
bcurrey@valuescopeinc.com
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Was Natural Gas the Fuel for Jerry Jones’ $90 Million Bet on Zeke

Was Natural Gas the Fuel for Jerry Jones’ $90 Million Bet on Zeke?

This last month, Jerry Jones, owner of Comstock Resources and the Dallas Cowboys, entered into a six-year, $90 million contract with running back Ezekiel Elliott, financed in part by natural gas.1  Jerry Jones was quoted as saying that, “the way you get 90 million [dollars] to pay Zeke Elliott is to drill wells with Comstock in the Haynesville.”

A Fox Business article goes on to say that while he’s best known for owning the Cowboys, Jerry Jones is first and foremost a businessman who made his fortune in Arkansas oil and gas exploration.  “I got into things when [industry demand] was soft, or not necessarily in favor, that’s how I bought the Cowboys,” Jones said. “Earlier in my career, I got into natural gas when everybody was getting out.”

Given that logic, Jones might consider this to be a good time to invest in natural gas.  As reported by the EIA, natural gas prices have continued their year-to-date downward trend, falling below $2.30 per MMBtu as of the end of August.2

Was Natural Gas The Fuel For Jerry Jones’ $90 Million Bet On Zeke

1.  Keith Allison from Hanover, MD, USA (https://commons.wikimedia.org/wiki/File:Ezekiel_Elliott_2017.jpg), „Ezekiel Elliott 2017“, Size, https://creativecommons.org/licenses/by-sa/2.0/legalcode

Was Natural Gas The Fuel For Jerry Jones’ $90 Million Bet On Zeke

E&P companies have responded to these low prices by reducing the number of rigs drilling gas wells to 160 nation-wide, a 14% decline from last year.3

This month, Jones and his family celebrated Comstock’s recent acquisition of Covey Park Energy.  The deal is valued at $2.2 billion and will double the company’s resources. Comstock shares soared 20% on the news — their biggest intraday gain in over a year. This meant that Jones’ fortune also grew by about $100 million, most of which he subsequently invested in Elliott.4

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on September 16, 2019, and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

Was Natural Gas The Fuel For Jerry Jones’ $90 Million Bet On Zeke

The starting point of $60 per barrel reflects the market’s reaction to the bombing of the Saudi Arabian facilities this last weekend.  Based on the September 16, 2019 prices, the markets indicate that in mid-October there is a 68% chance that oil prices will be between $53.00 and $70.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $45.50 and $86.00.  In mid-February 2020, the +/- 1σ price range is $46.00 to $72.50 per barrel, and the 2σ range is $33.50 to $95.00 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $33 and $95 per barrel and a 97.5% probability it will not be above $95 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.67 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-October 2019, the +/- 1σ price range is $2.35 to $3.15 per barrel (68% probability) and the +/- 2σ range is $1.95 to $3.80 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certain outcomes—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $95 by mid-February 2020, so I wouldn’t count on it.”

[1] Natural gas investment helped pay for Ezekiel Elliott, by Eleanor Terrett, Published September 05, 2019, Business Leaders FOX Business

[2] https://www.eia.gov/naturalgas/weekly/

[3] Ibid.

[4] Natural gas investment helped pay for Ezekiel Elliott, by Eleanor Terrett, Published September 05, 2019, Business Leaders FOX Business

For more information, contact:

Brad R. Currey, CEIV, CFA

DIRECTOR – ENERGY PRACTICE LEADER
bcurrey@valuescopeinc.com
Full Bio →

If you liked this blog you may enjoy reading some of our other blogs here.