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Can We Expect Another Oil Price Dip Soon?


Friday August 25, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Frac sand use declining

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- The spike in drilling activity this year compared to last has caused the price of frac sand to sky rocket. Prices are expected to rise 62 percent this year to $47 per ton, according to IHS Markit, cited by Reuters.

- As a result, shale drillers are cutting back on the use of sand in order to restrain cost inflation. Sand use represents about 12 percent of the cost of drilling, according to Reuters.

- But as drillers become more efficient with their sand use, it could spell trouble for sand producers at a time when new mines are coming online.

- The share prices of Hi-Crush Partners LP (NYSE: HCLP) and U.S. Silica Holdings (NYSE: SLCA), two top sand suppliers, have plunged this year.

2. Investors’ optimism on oil flat lines

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- Bets on rising WTI prices stagnated in the most recent data release, a sign that the uptick in bullishness surrounding oil prices since June has reached a temporary ceiling.

- That has corresponded with flat, and at times, flagging oil prices. WTI briefly hit $50 per barrel in late July, but has since fallen back.

- The end of the summer driving season is near, likely causing some caution for investors wary of another dip in prices on weakening demand.

- “The inability of the market to really push through $50 suggests that the buyers don’t have confidence to continue to try to build positions above that level because of the uncertainty about our fundamental picture right now,” Gene McGillian, market research manager at Tradition Energy told Bloomberg.

3. U.S. LNG arrives in Eastern Europe, but Russia still dominates

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- Lithuania just imported its first American LNG cargo, from Cheniere Energy (NYSE: LNG). The occasion marks a potential turning point in which U.S. LNG begins to undermine Russia’s market share in Europe.

- But Europe still imports 120 billion cubic meters (bcm) of Russian gas, about a third of its total needs. U.S. LNG export capacity, in total, only stands at 14 bcm today. So there is little threat to Russia’s grip in Europe from the U.S.

- Russia can still beat U.S. on price for gas sales in Europe.

- Yet, U.S. LNG, along with other sources of LNG, is forcing Gazprom to make price cuts in order to hold onto that market share. That is a significant concession and a change from years past.

- The real test will unfold over the next few years – U.S. LNG capacity is set to grow from 14 bcm to 107 bcm by 2022.

4. China oil production falling, gas rising

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- Oil production at China’s major state-owned firms continues to decline, with output at PetroChina, for example, falling by 7.4 percent in the first half of 2017 compared to the same period a year earlier.

- At the same time PetroChina has focused on boosting natural gas production, and output jumped 5.3 percent in the same timeframe.

- PetroChina’s lifting costs declined by 4.2 percent, according to Bloomberg.

- PetroChina Co. decided to dish out $1.9 billion in dividends to shareholders, or its entire first half-year net income. It is probably a one-off payment, but viewed as a sign that China’s state-owned firms are trying to attract investors.

5. Mexico looking for shale investment

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- Mexico just opened up its Burgos Basin to investment from private companies, the first time non-state companies will get a crack at the shale basin.

- The Burgos is expected to be rich in natural gas, and Mexican authorities are keen for new investment to halt the countries falling natural gas production.

- State-owned Pemex, struggling with its own financial issues, has slashed capex significantly in recent years, putting more emphasis on the need for private investment.

- There is a lot of excitement surrounding the Burgos, not least because it is seen as essentially an extension of the highly prolific Eagle Ford shale in South Texas.

- The Mexican government is expected to open up more acreage to private industry in the months ahead.

6. Debt rising in Middle East

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- Low oil prices since 2014 have blown a whole in the budgets of major oil producing nations in the Middle East.

- That has led to a wave of debt issuance in order to plug fiscal holes. The value of bond sales has skyrocketed from just $3.15 billion in the region in 2015 up to $38.6 billion last year. Bond sales have reached $24.5 billion so far this year.

- It has also led to privatization as a way of raising revenue. There have been 32 IPOs in the Middle East in 2017, more than the previous two years combined.

- “The reality is oil prices are unlikely to recover significantly and not only are governments trying to diversify, but they’re also trying to prioritize key investments in critical sectors,” Mustafa Ansari, energy economist at development bank Arab Petroleum Investments Corp., told the WSJ in an interview.

- Obviously, the one that looms large is the pending IPO of Saudi Aramco, an offering of 5 percent of the company that is expected to raise tens of billions of dollars.

7. Chevron’s free cash flow suffered in recent years

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- Chevron’s (NYSE: CVX) CEO John Watson is rumored to be heading for a departure, leaving behind a checkered seven-year tenure.

- As Bloomberg Gadfly notes, Chevron’s free cash flow suffered under his leadership, dropping from over $3.7 billion after dividends at a relative peak in the first quarter of 2011, down to negative $7 billion in the first quarter of 2015.

- Chevron burned through cash paying for the massive Gorgon LNG project in those years, among other megaprojects. And the collapse of oil prices in 2014 really dragged down earnings.

- But the oil bust has forced Chevron to right the ship, cutting costs, cutting spending and returning roughly to a breakeven point most recently.

- But it should be smoother sailing from here. Chevron’s megaprojects are either online or coming online, leading to production growth and allowing for spending to ease.

- That should allow the company to dramatically improve cash flow in the years ahead.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.

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