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. M&A activity picking up
- In the second quarter, the value of the average M&A deal in the oil industry reached its highest level since the third quarter of 2014. The average deal was valued at $182 million.
- Range Resources (NYSE: RRC) acquired Memorial Resource Development. Devon Energy (NYSE: DVN) sold off assets in the Midland and Anadarko Basins.
- The sharp increase in the value of M&A deals indicates rising confidence in the oil markets as prices began to rebound. Oil prices jumped from $26 per barrel at their lowest point in the first quarter to $50 per barrel at the end of the second.
- There is no shortage of companies looking to dispose of assets, a fact that has pushed down the value of assets themselves. Debt markets remained interested in the sector throughout 2015, allowing E&Ps to access debt financing. More equity has been issued lately, providing cash to companies for asset acquisition.
2. Gasoline spreads move into contango
- Gasoline margins are typically in a state of backwardation in the summer, in which front-month contracts trade at a premium to longer-term futures. That happens because of peak driving season,…
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. M&A activity picking up

- In the second quarter, the value of the average M&A deal in the oil industry reached its highest level since the third quarter of 2014. The average deal was valued at $182 million.
- Range Resources (NYSE: RRC) acquired Memorial Resource Development. Devon Energy (NYSE: DVN) sold off assets in the Midland and Anadarko Basins.
- The sharp increase in the value of M&A deals indicates rising confidence in the oil markets as prices began to rebound. Oil prices jumped from $26 per barrel at their lowest point in the first quarter to $50 per barrel at the end of the second.
- There is no shortage of companies looking to dispose of assets, a fact that has pushed down the value of assets themselves. Debt markets remained interested in the sector throughout 2015, allowing E&Ps to access debt financing. More equity has been issued lately, providing cash to companies for asset acquisition.
2. Gasoline spreads move into contango

- Gasoline margins are typically in a state of backwardation in the summer, in which front-month contracts trade at a premium to longer-term futures. That happens because of peak driving season, creating short-term demand in the summer months.
- But this year is more atypical, with gasoline markets in a state of contango – front-month contracts are trading at a discount to gasoline futures one year out.
- This reflects the enormous levels of gasoline inventories, storage that has piled up because of too much supply.
- In June, the average RBOB 1st-13th spread was -8 cents per gallon, the first June contango since 2010, according to the EIA.
- Gasoline inventories remain significantly above the five-year average for this time of year and will continue to weigh on oil prices.
3. North Sea decommissioning costs set to spike

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- Aging oil fields in the North Sea are set to shut down at an accelerating pace in the coming years. Spending on decommissioning is expected to reach $22.2 billion between 2014 and 2024, a figure that is 16 percent higher than what was expected two years ago.
- Annual costs are expected to spike from 899 million pounds in 2016 to 2.8 billion pounds in 2018.
- About 30 percent of the oil fields in the North Sea are already operating at a loss with oil prices below $50 per barrel, according to Wood Mackenzie.
- Production has been in long-term decline from the region, falling from 2.9 million barrels per day in 1999 down to just 965,000 barrels per day last year.
- The Brexit vote has pushed the pound to its lowest level in three decades, providing a temporary reprieve to companies that have operating costs in pounds. But the political uncertainty makes the region less competitive for what is now scarce available investment across the industry.
4. Floating storage rises again

- Short-term floating storage increased by about 1 million barrels in June, rising to 95 million barrels around the world.
- That is highest level since 2009, surpassing the elevated storage levels seen earlier this year.
- This is extremely bearish for oil prices, as a glut of both crude and refined products fill up onshore storage facilities.
- Although there is a market contango, it is not large enough to justify floating storage on profits alone. The rise of floating storage is occurring because of regional gluts in supply, forcing tankers to sit idle at clogged ports.
5. Russia to boost oil production

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- Russia is set to boost oil production by 590,000 barrels per day between 2016 and 2018, which will allow it to break the Soviet era record high.
- Goldman Sachs estimates Russia’s oil production will reach 11.65 million barrels per day in 2018, which will make it the largest oil producer in the world by a significant margin.
- “At current oil prices, Russian oils are among the few global majors that can maintain their growth plans and dividends,” Goldman Sachs wrote in a report after meeting with Russian oil executives.
- Goldman says the average Russian oil field breaks even at $10 per barrel.
- Russia’s cheap oil fields are helped by the contribution from new Arctic fields, which as Bloomberg Gadfly notes, has already added at least 130,000 barrels per day since last year.
6. Nigerian outages lead to stock drawdowns

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- The attacks from the Niger Delta Avengers have slashed Nigeria’s oil production to the lowest level in years.
- Estimates vary, especially since some production has come back, but Nigeria has lost somewhere between 500,000 and 1 million barrels per day of oil production because of a series of attacks on platforms, pipelines and oil wells.
- The collapse of oil prices has already cut government revenues in half. But the loss of such a large volume of production has tossed the country into an economic crisis.
- Meanwhile, in an effort to hold onto some market share, Nigeria is dipping into its oil inventories to meet export demand.
- Inventories have declined by 78 percent to just 2.2 million barrels as of May. That is the lowest level in more than two years.
7. Oil execs prioritize production

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- According to a new report from Moody’s Investors Service, about one quarter of bonuses given to oil and gas executives is tied to increasing their company’s production and reserves.
- At the high end, some oil executives have more than 40 percent of their bonus related to boosting production.
- On the other hand, credit metrics such as improving cash flow or achieving a higher return on capital invested make up the smallest slice of bonus packages.
- The incentive structure helps explain the dogged persistence by many companies to maintain or boost production.
- "They’re finding it difficult to change course," Christian Plath, a Moody’s vice president and corporate governance specialist, said according to Bloomberg. "It’s like a supertanker going full speed. Making a quick course correction is hard to do."
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.