Investors Are Scrambling To Get Into This Crucial Metal

Friday January 3, 2020

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 and metals sectors. 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. Shale wells produce less than expected

• The Wall Street Journal reported that thousands of shale wells are producing less oil and gas than many companies predicted.
• A year ago, the WSJ found that wells from 29 of the largest shale companies are on track to produce 10 percent less oil and gas over their lifetimes than those companies initially predicted. In the waning days of 2019, WSJ updated that conclusion, finding that those wells are on track to produce 15 percent less than expected.
• Whiting Petroleum (NYSE: WLL), for example, told investors in 2015 that its wells drilled in North Dakota would each produce 700,000 barrels of oil and gas over their lifetimes. Based on 2019 data from Rystad Energy, the WSJ found that Whiting's wells were on track to produce about 590,000 bpd. The most updated data puts that figure at just 540,000 bpd.
• Shale wells are declining faster than expected, and it appears to be an industry-wide problem.

2. Investors flock to platinum

• Investors poured $850 million into ETFs tracking platinum in 2019, the largest annual inflow, according to Bloomberg.
• Platinum is used in emissions-control technology in diesel cars. Diesel has fallen out of favor, but stricter emissions standards are stoking demand for platinum.
• "Platinum was very under-invested in 2017 and 2018 and that was very much due to the thoughts on diesel" after the VW emissions scandal, Ryan McKay, TD Securities commodity strategist, told Bloomberg. "Investors started to take more of a liking to platinum this year. Its strong correlation with gold has certainly helped. That's another driver in the ETF as well."
• Platinum, palladium and rhodium could see a supply shortage.

3. U.S. oil production rises again

• The latest EIA data shows that U.S. oil production increased significantly in October, rising by 171,000 bpd from a month earlier.
• The gains were made in familiar areas - Texas added 53,000 bpd, North Dakota added 70,000 bpd and Colorado added 39,000 bpd. Production was mostly flat in New Mexico and offshore Gulf of Mexico, and declined slightly in Oklahoma.
• The large increase offered further evidence that the shale boom is not over, despite financial stress, fewer rigs and more modest drilling activity.
• At 12.655 mb/d for October, U.S. oil production continues to break records. Most analysts see output growing in 2020, but there is a much wider range of forecasts than in years past, from around 400,000 bpd on the low end to 1 mb/d on the high end.

4. 3Q Review of global oil industry

• The EIA said that a little more than 50 percent of 112 global oil and gas companies (not just shale) were cash flow positive in the third quarter.
• That number was up from the previous two quarters.
• 78 percent of companies reported positive upstream earnings.
• Cash flow from operations in third quarter was $128 billion, down 12 percent from a year earlier.
• Capex was $75 billion, down 9 percent from a year earlier.

5. Energy industry's market cap declines

• The market capitalization of 112 global oil and gas companies surveyed by the EIA declined 24 percent in the third quarter, year-on-year.
• 2019 saw the entire sector decline, with U.S. shale E&Ps hit particularly hard.
• Apple (NASDAQ: AAPL), with a market cap of $1.3 trillion, is worth more than the entire U.S. energy sector, according to Bank of America Merrill Lynch.
• Analysts have said that the industry could be hitting an inflection point. Valuations and share prices are beaten down, and the market is starting to take on a bullish tinge.

6. Oil companies will need to reduce production…some more than others

• In order to hit global climate targets, the oil majors have aimed to slash their emissions. But in order to stay within 2-degrees of warming, the global oil industry will have to reduce production on an absolute basis.
• According to Carbon Tracker, the seven largest companies will have to cut emissions by 40 percent, which translates to a cut in production by a third.
• As high-cost output will be knocked offline first, some will be forced out more than others. Saudi Aramco, with its low cost production, doesn't see any immediate threat on the horizon. Aramco could be the last man standing.
• ConocoPhillips (NYSE: COP), on the other hand, may have to reduce output by 85 percent by 2040, according to the scenario, due to its heavy reliance on shale.

7. Shale debt comes due

• Roughly 200 companies went bankrupt in North America between 2015 and 2019. In that timeframe, drillers also took out around $250 billion in new debt to stay alive.
• Much of that will soon come due. 2020 will be a crucial year for the U.S. shale industry, as a whopping $41 billion in maturing debt looms.
• Combined, the industry has $200 billion in maturing debt over the next four years.
• Drillers are under pressure to cut costs and post positive cash flow so that the profits can be used to pay off debt. The cutback in spending, which could be as much as 10 percent in 2020, is expected to lead to slower production growth.

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