Despite High Debt Levels Energy Investors Remain Undaunted

We begin with a look at the key figures for the U.S. oil and energy industry this week from which we see that oil prices continue to inch down while inventory levels surged

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Oil prices retreated from their multi-month highs this week, as bullish data seemed to be in short supply, replaced by several gloomy figures from the EIA. U.S. inventory levels surged once again this week by 9.3 million barrels, hitting a new record of 532 million barrels. Production continues to inch down, but the U.S. is importing more oil, which is diverting some production into storage. Oil prices fell below $40, but steadied during Friday’s early trading hours.

Bad energy debt to exceed good energy debt. The number of energy loans that are in danger of default could jump above 50 percent this year, according to The Wall Street Journal, presenting some problems for several major banks. Lenders are starting to back away from new loans, declining to renew credit, and selling off bad debt. That could slash the available credit lines for some struggling oil and gas producers this year, potentially raising some liquidity pressure on E&P companies. An estimated 51 oil and gas companies have fallen into bankruptcy since early 2015. The periodic credit redetermination period is coming up, which could result in credit lines offered to energy companies being reduced by 20 to 30 percent. The total debt in the entire oil and gas sector hit $3 trillion in 2014, or about three times higher than 2006 levels. Related: Offshore Lease Sale Disrupted by Protestors Shouting “Shut it Down”

Oil industry still able to access capital. Despite posting record losses in potentially seeing credit lines cut, several oil companies have returned to the equity markets, where they are still being welcomed with open arms. Reuters reports that at least 15 oil companies have announced new offerings in 2016, with minimal damage to their share prices. The companies surveyed have outperformed an oil and producers index by 3 percent on average.

But another way of looking at that statistic is that only well-positioned companies have issued new stock. Companies like Pioneer Natural Resources (NYSE: PXD), Callon Petroleum Co (NYSE: CPE), and Oasis Petroleum (NYSE: OAS) have performed better than some of their peers since announcing new stock offerings. Shareholders seem willing to provide companies with new cash infusions. “People would rather they have money in their pocket and survive,” Irene Haas, analyst at Wunderlich Securities, told Reuters. “They’ll worry about dilution later.” U.S. oil and gas exploration companies have issued a combined $10 billion in new equity this year.

ExxonMobil (NYSE: XOM) looks at stake in Mozambique natural gas. The WSJ reports that ExxonMobil is on the verge of purchasing a stake in a large offshore natural gas project in Mozambique from Italian oil company Eni (NYSE: E). While the details are unconfirmed, the WSJ says that Exxon could take a 20 percent stake in the project. In 2013, before the market crash, such a stake would have been at $4 billion. The project is an important one, an offshore field that could turn Mozambique and East Africa into a significant LNG exporter. The deal could be evidence that some of the largest oil companies are on the hunt for bargains while they can get them. It would also allow Exxon to grow its reserve base through acquisition.

Related: Oil Prices Continue To Tumble As Supply Glut Fears Return

SEC rules Exxon must offer climate resolution to shareholders. The SEC ruled that the oil major must offer a resolution to shareholders during its annual proxy, a vote that would require Exxon to provide much more detailed information about its risks to climate change and/or its risks to legislation and regulation intended to cut greenhouse gas emissions. In the wake of the Paris climate agreement, any added costs through taxes or stringent limits on oil and gas production would reduce long-term shareholder value, something that the SEC argues shareholders have a right to know.

Russia could face long gradual decline in oil. Russia’s oil output hit a post-Soviet record of 10.9 mb/d in January 2016, but that could be a ceiling as the country’s massive oil fields face decline. The bulk of Russia’s oil output comes from its aging West Siberian fields, which require ever more investment just to keep output stable. The depreciation of the ruble has helped a bit, lowering the real cost of spending on production and allowing Russian companies to increase investment by one-third this year. However, some long-term projects are being pushed off due to the financial squeeze from western sanctions and low oil prices. An estimated 29 projects, amounting to 500,000 barrels per day in new production, have been delayed. With most of Russia’s large oil fields having been under production since the Soviet era, and with precious few new sources of supply, Russia is facing long-term decline.

Investment in renewable energy twice as high as global coal and gas investment. Renewable energy still makes up a small fraction of electricity generation worldwide, but the trend is in favor of solar and wind. Global investment in renewable energy in 2015 was twice as high as investment in new coal and natural gas power plants. And that figure included the developing world. China alone accounted for one-third of the $286 billion invested in clean energy last year. Related: Why We Could See An Oil Price Shock In 2016

Rig count resumes decline. The rig count fell once again, after taking a one-week pause last week. Baker Hughes reported its figures one day earlier than usual, revealing that the U.S. rig count fell by another 12 for the week ending on March 24 (-15 oil rigs, +3 gas rigs). The data shows that the oil patch is not done shedding rigs, despite the recent hiatus.

U.S. gives OK to offshore wind. The Bureau of Ocean Energy Management gave the greenlight to a small plan by Dominion Resources to install offshore wind turbines off the coast of Virginia. The plan would only involve a 6 megawatt project, but the state hopes it would demonstrate offshore wind’s potential. The U.S., with no offshore wind installations to date, lags far behind Europe.

ISIS is reeling. Despite the high-profile attacks in Brussels this week, The Washington Post reports that ISIS is quickly losing strength. The militant group has not won any key battles in months, top leaders are increasing being taken out by airstrikes, and fighters routinely flee the battle field when confronted. In a story that is still developing, NBC News reported on March 25 that ISIS’ second in command was killed this month in a raid. The American and European public may be struck with fear after a string of attacks in France and Belgium, but ISIS is rapidly losing territory, finances, and strength in Iraq and Syria.

By Evan Kelly of Oilprice.com

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