Oil Majors See Cash Flow Improve Amid Tighter Crack Spread

Friday May 5, 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. Total SA back to pre-2014 cash flow

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- French oil giant Total SA (NYSE: TOT) posted first quarter free cash flow of $1.7 billion, its largest since 2013.
- Impressively, the figure is larger than some of the figures for the company when oil was trading at $100 per barrel.
- Total has performed better than its peers during the three-year downturn, and its latest results are the third consecutive quarter of positive free cash flow.
- Whereas the likes of Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX) and BP (NYSE: BP) are still dealing with shaky figures and large debt loads, Total now has the financial firepower to invest in new projects and grow future production.

2. Drilling costs on the rise again

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- The rebound in drilling activity in the U.S. is finally starting to push up costs, suggesting that some of the savings in recent years from the industry will prove to be cyclical.
- The cost of rigs, equipment, well completions, frac sand and other oilfield services are rising again as drilling picks up.
- Reuters estimates that drilling costs have climbed by 7 percent since November 2016, which offsets some of the 34 percent decline in costs since March 2014.
- But rising costs are concentrated only in the U.S. shale sector. Oilfield services firms outside of the U.S. are still struggling with a depressed market.
- That has created a two-track industry: oilfield services companies exposed to U.S. shale are seeing their fortunes on the rise; all others are still in an industry recession.

3. Oil prices crashed on Thursday

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- WTI and Brent plunged 5 percent on Thursday, on deepening concerns over U.S. shale overwhelming the OPEC cuts.
- It was the worst one-day performance in two months, taking oil prices back to levels not seen since the OPEC deal was announced in November.
- U.S. oil production is up to 9.3 mb/d, up nearly 800,000 bpd since bottoming out last September. That helped minimize recent oil inventory declines, disappointing the markets and causing the sharp selloff in prices.
- Because prices broke through technical resistance levels – blowing through both the 50-day and 200-day moving average – there could be more room to fall.

4. Hedge funds sell off oil futures

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- Hedge funds and other money managers turned sharply bearish on crude oil at the end of April.
- They slashed their net-long positions on Brent and WTI futures by the equivalent of 139 million barrels for the week ending on April 25.
- That was one of the steepest declines on record, and wipes out the buildup over the previous three weeks, according to Reuters.
- The positioning by speculators is now more bearish than it was at the start of the year.
- The selloff is helping to magnify the oil price declines seen this week.
- The flip side is that if the short positions grow too much, oil prices could become overextended on the downside.

5. Utility-scale solar installations surging

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- Utility-scale solar installations grew by 72 percent per year on average between 2010 and 2016, the fastest growth out of any other source of electricity.
- Utility-scale solar now accounts for 2 percent of utility-scale electricity capacity at 21.5 gigawatts. Residential solar adds in another 3.4 gigawatts.
- Last year was a record year for solar, with the installation of 7.6 gigawatts in the U.S.
- Solar is still a small part of the U.S. electricity mix, but is now doing battle with wind for the top spot for all new sources of electricity.

6. Refining margins sink amid refined product surplus

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- The margins for refined products averaged $11.70 per barrel in the first quarter, up from $11.40 in the fourth quarter and $10.50 per barrel a year ago.
- Margins surged in March and early April as the market turned more bullish.
- U.S. gasoline inventories declined towards more average levels, offering signs of the market moving towards balance.
- But margins slipped sharply in recent weeks. Refiners have ratcheted up refining runs to record levels in the U.S.
- Motorists have been unable to absorb all the new product, and gasoline inventories started to rise more sharply.
- As a result, margins fell sharply recently.

7. Oil majors move into Argentina

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- Several large oil companies are rolling the dice on Argentina as the next big thing in shale.
- Argentina is thought to hold some 800 trillion cubic feet of shale gas and 27 billion barrels of oil.
- Royal Dutch Shell (NYSE: RSD.A), ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have had a presence in Argentina’s vast Vaca Muerta shale for several years, but interest is heating up dramatically.
- Exxon is expected to greenlight heavier investment in the Vaca Muerta this year. Exxon has proposed more than $10 billion in Argentina investment over the next few decades.
- Total (NYSE: TOT) just announced its first major final investment decision in several years, and it chose to greenlight its shale project in Argentina.
- Costs have come down in the Vaca Muerta but still can run two or three times more than shale drilling in the U.S.

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