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Evan Kelly

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Oil Up On OPEC Rumors, U.S. Shale Shutdowns

First we take a look at this week's key figures for the oil and gas industry from which we see that oil prices are recovering slightly as U.S. production drops. While we continue to see rising U.S. crude inventories, it seems that U.S. refinery runs are slightly down.


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 February 26th 2016

The speculation surrounding the possibility of an OPEC production cut have not gone away, despite the comments from Saudi oil minister Ali al-Naimi earlier this week. Venezuela’s oil minister stoked the markets when he said on Thursday that representatives from Russia, Saudi Arabia, Qatar, and Venezuela would meet in mid-March to discuss cooperative efforts to stabilize oil prices. Oil prices shot up more than 1 percent on the news, but there isn’t much new here to trade on. These countries will move forward with the production freeze, but that will likely have only a limited effect on the fundamentals in the short-term. An actual production cut remains a remote possibility for now. Related: A Home-Battery System that Could Rival Tesla

Supply falls. Oil benchmarks posted substantial gains for the week due to rising expectations of a decline in U.S. oil production. As the fourth quarter earnings announcements wrap up, we have a clearer picture of the supply hit that is going to take place, particularly in U.S. shale. Continental Resources (NYSE: CLR) has already said that it would see production fall by 10 percent this year. Whiting Petroleum (NYSE: WLL) expects a 15 percent fall. Devon Energy (NYSE: DVN) will see output fall by 10 percent. Apache Corp. (NYSE: APA) expects a drop of more than 10 percent. These losses are starting to mount and will put a dent into global supply this year. The IEA sees a decline in the U.S. of 600,000 barrels per day, but as companies continue to cut back, that could be a conservative estimate.

Halliburton job losses. Halliburton (NYSE: HAL) announced another round of layoffs this week, cutting an additional 5,000 workers or about 8 percent of its workforce. That comes after a job cull of about 4,000 people in the fourth quarter of 2015. That brings the job losses for the oilfield services company since 2014 to 29,000.

Repsol SA dividend cut. Although not considered to be an oil major, the largest oil company in Spain, Repsol SA (BME: REP), became the latest prominent producer to cut its dividend. The board recommended a dividend cut from 0.5 to 0.3 euros per share. Repsol took an impairment charge of 2.96 billion euros (USD$3.26 billion). The poor performance was in part due to the $13 billion purchase of Talisman Energy last year, a Canadian company that has since posted losses. Repsol has lost have of its market share since then. Its debt is at its highest level in 27 years – net debt stands at 12 billion euros. Related: 35% Of Public Oil Companies Could Face Bankruptcy

Chesapeake Energy results and asset sale. Chesapeake Energy (NYSE: CHK) made multiple headlines this week. The U.S.’ second largest producer of natural gas announced its fourth quarter and full-year results for 2015, posting a net loss of $329 million, or $0.20 per share, although that excludes billions of dollars in impairment charges. Still, investors chose to focus on several bright spots for the company.

Chesapeake slashed capex for 2016 down to a range of $1.3-$1.8 billion, or a cut of 57 percent from 2015 levels. It also announced a major asset sale to FourPoint Energy, a deal that will give Chesapeake an additional $385 million to work with as it deals with upcoming debt payments. The sale also marks Chesapeake’s exit from the Anadarko Basin. Investors loved the news – Chesapeake’s stock surged more than 20 percent on Wednesday.


Fitch Ratings, however, remains unimpressed. The ratings agency downgraded Chesapeake’s debt from B to B- with a “negative” outlook. In its report, Fitch wrote that the “downgrade reflects the heightened liquidity risk given the prospect for a lower and longer price recovery profile.” Not only that, but Fitch also saw trouble ahead because of “the potential for low hydrocarbon prices to negatively impact the company’s plans to raise liquidity through asset sales and could also have an unfavorable impact on the next round of borrowing-base redeterminations.”

Nigeria devaluation? Citigroup argues that oil M&A deals have dried in Nigeria because investors are wary of a forthcoming currency devaluation. “I see this as a year of pause,” Miguel Melo Azevedo, Citigroup’s head of investment banking for Africa, told Bloomberg in an interview. “You will look very stupid if you buy something in Nigeria and tomorrow it gets devalued. There’s an embarrassment factor.” Since March 2015, Nigeria’s naira has been pegged to the dollar at a rate of 197 to 199 per dollar. But on the black market the naira is weaker by about 34 percent. There is speculation that the Nigerian government won’t be able to hold much longer if oil prices stay low. The first quarter is not over yet, but so far M&A deals are down by nearly 75 percent from the same quarter a year ago. Related: Is This The Most Bullish News For Oil Since 2014?

First LNG shipment leaves from U.S. shores. Cheniere Energy (NYSE: LNG) successfully sent out its first LNG cargo, an event that has been highly-anticipated for years since it marks the first shipment from American shores. The cargo left from the Sabine Pass facility and headed for Brazil, a curious destination after years of speculation that the U.S. could take advantage of high LNG landing prices in Europe and Asia. The landmark event comes at a bad time for LNG exporters. Abundant and growing supplies are running into a wall of flat demand, and prices have crashed. The oversupply could take years to abate.

Australian LNG project nearing completion too. The massive $54 billion Gorgon LNG facility in Australia is nearing completion, a project that has been jointly financed by Chevron (NYSE: CVX), Shell (NYSE: RDS.A) and ExxonMobil (NYSE: XOM). Another six LNG projects will come online by next year as well. With LNG spot prices down, the Gorgon LNG suddenly looks like a white elephant. The companies remain confident that the project will return value to shareholders over the 40-year lifespan. But Neil Beveridge, senior analyst at Bernstein Research in Hong Kong, is not so sure. “[I]n terms of paying down that $54 billion capital charge, that's going to take an awful long time, if ever,” he said to Reuters.

Kurdish pipeline shut. The oil pipeline that runs from Kurdistan to Turkey will be shut for at least two more weeks due to security threats and needed repairs. The shutdown is inflicting severe damage on the finances of Kurdistan, which depends on oil exports.

By Evan Kelly of Oilprice.com

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