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Midweek Sector Update: Oil Markets May Not Need To Worry About Greece

The Greek debt crisis is coming to a head as negotiators from Greece and its European creditors meet in Brussels for a last-ditch emergency meeting. A glimmer of hope arose over the weekend as Greece appeared to make fresh concessions. After Greece promised a new round of higher taxes and spending cuts, European officials welcomed the move and said that a deal could come “within days.” The simmering crisis will need to be dealt with this week as a deadline for Greece to meet a repayment of an IMF loan nears. If Europe does not agree to roll over the debt, Greece risks a default. Beyond that, who knows? The word “Grexit” has been in the news quite a bit in recent days. For now, it appears that once again all parties will pull back from the brink.

A deal over Greek debt would avoid market turmoil, as Europe once again kicks the can down the road. That would prevent a slide in oil prices, as Europe’s economy and currency would escape much deeper damage. Still oil prices are showing signs of weakness on the back of a strong dollar. Also, the latest factory data from China shows weak manufacturing activity for several months in a row. China’s manufacturing index hit 49.6 in June, where numbers below 50.0 indicate contraction. That presents concern over China’s economy, and thus, the global economy. On the other hand, it also raises the chances of economic stimulus coming from Beijing.

BP (NYSE: BP) saw its credit outlook downgraded by Fitch, dipping into negative territory. The ratings agency said that low oil prices along with the costs stemming from the Deepwater Horizon blowout will drag down the British oil giant. If BP is forced to pay the maximum penalty of $13.7 billion related to Clean Water Act violations, BP’s debt could exceed its guidance for the next few years. Related: The Dark Side Of The Shale Bust

In M&A news, Energy Transfer Equity (NYSE: ETE), an oil and gas pipeline company based in Texas, tried to purchase Williams Companies Inc. (NYSE: WMB), another pipeline company based in Tulsa, OK, but Williams turned down the almost $50 billion offer. Williams saw its share price skyrocket by more than 25 percent after news broke of the attempted takeover. Williams has come under pressure by its investors to sell out to another company, and the company’s management will now need to find a better offer than the $64 per share it received from Energy Transfer. Still, despite the rejection, Energy Transfer said it was not ready to move on and instead would engage with Williams over specifics. The proposal highlights how investors have prized pipeline companies because of their fixed-fee based structures, which make money regardless of oil prices – a highly valuable business model given recent market volatility.

Despite the attempted takeover, M&A activity has been a lot slower than many had expected this year. Distressed firms offer appetizing targets for companies on the hunt, but the availability of credit and new equity has kept a lot of drillers going. As a result, there just haven’t been a lot of deals in the oil and gas sector this year. The FT says that will likely change in the coming months. With new equity less of an option moving forward, credit lines expected to be further slashed in September and October, and hedged positions expiring, weaker firms could start to run out of time. That means that more will likely be scooped up by their healthier competitors during the second half of this year. Related: Why A U.S Shale Slowdown Will Hardly Affect Oil Prices

An explosion hit a Pemex platform in the Gulf of Mexico on June 22, but at the time it was unclear if anyone was injured or if production had been affected. The platform was the Akal-H at the Akal project, which drills in the massive Cantarell oil field. The Cantarell has been Mexico’s bread and butter. Once one of the most productive oil fields in the world, the field peaked in 2004 at 2.1 million barrels per day. That rate has come down dramatically, falling to just 440,000 barrels per day in 2013. Located in the Bay of Campeche, the region still accounts for about three-quarters of Mexico’s total oil output. Preliminary reports say that Pemex may have contained the fire and avoided a disaster.

Royal Dutch Shell (NYSE: RDS.A) has cleared several more hurdles that stand in its way of drilling in the Arctic this summer. The U.S. Coast Guard gave Shell’s drillship, the Noble Discoverer, a “certificate of compliance,” a critical permit. Still, Shell awaits more permits before it can actually begin drilling. Its first ship, the Polar Pioneer, left Seattle a little over a week ago amid protests from “kayaktivists,” hoping to block the rig’s path as it departed for Alaska. The Polar Pioneer will sit in Dutch Harbor, in Southern Alaska, until it can receive outstanding permits, perhaps sometime after July 1. From there, the rig will head north to the Chukchi Sea, where the company plans on drilling two wells in the Burger Prospect. The window for drilling is relatively short – just a few months this summer while sea ice is melted. Related: Shale Resources Key To Deciding Argentina’s Future

Another controversial standoff is unfolding in the U.K., where plans by exploration company Cuadrilla to develop shale gas has come under intense scrutiny. Fracking is less accepted in Europe than it is in the United States, but the U.K. is one country where the controversial drilling practice may move forward. It will come down to a local planning council in Lancashire. That is where Cuadrilla hopes to drill, but after four years of back and forth, a decision that could clear the way for Cuadrilla could come on June 24. If approved, it could mark the first shale wells to be fractured in Western Europe. The British government is keen to see Cuadrilla move forward. With oil and gas production from the North Sea likely in terminal decline, fracking offers the potential to stop the industry’s decay.

Speaking of the North Sea, German energy company E.ON (FRA: EOAN) is looking to sell off its assets in both Algeria and the North Sea in order to raise cash. The German company is struggling under the onslaught of renewable energy and Germany’s shift away from nuclear power. E.ON hopes to raise around $2 billion by selling some of its assets, but the level of interest from buyers is unclear.

By Evan Kelly Of Oilprice.com


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