The oil price war has already claimed its first victim.
Whiting Petroleum Corp. (NYSE: WLL), once the largest oil and gas producer in North Dakota's Bakken Shale, has filed for Chapter 11 bankruptcy becoming the first major shale producer to do so in the current year. Whiting has cited the "severe downturn" in oil and gas prices courtesy of the Saudi Arabia-Russia oil price war and COVID-19-related impact on demand.
But this shale producer has no plans to go into a state of suspended animation: Whiting has announced that it will go ahead with full production claiming it has ample liquidity with $585M of cash on its balance sheet and has reached an agreement in principle with certain noteholders for a comprehensive restructuring.
In short, Whiting’s playbook is to buy more time hoping for a rebound in energy prices to bail it out.
WLL shares have jumped 15.1 percent after the bankruptcy announcement--probably an indication that investors believe the company has healthy odds at a comeback. Still, the shares have crashed an appalling 95 percent YTD, making the sector’s 46.9 percent YTD plunge appear tame in comparison. Whiting has announced that existing shareholders holders will only receive 3 percent of the equity in the reorganized company.
The bankruptcy is symptomatic of the sheer pain reverberating throughout the oil supply chain as per Bloomberg.
It also serves as a cautionary tale for the battered natural gas sector which is, sadly, following in the footsteps of Saudi Arabia, Russia and the oil sector by stubbornly refusing to lower production.
Source: CNN Money
In what could wind up being another head fake, natural gas prices have rallied 9.2 percent on Tuesday to trade at a 30-day high of $1.91/MMBtu after reports that colder than normal weather is expected in the United States for the next 6-10 and 8-14 days. With prices having broken resistance at the 50-day moving average of $1.84 and long positions increasing vs. decreasing short positions, the natural gas bulls could carry the day--but only in the short-term.
The long-term natural gas outlook remains as tenuous as it has been ever since the sector suffered two consecutive seasons of warmer-than-normal winters. Like the oil sector, natural gas producers are largely going on with business as usual with nobody willing to be the first to blink.
Indeed, the sector is sitting on even shakier grounds because it lacks a strong organization like OPEC to try and maintain some semblance of order with the natural gas equivalent--the Gas Exporting Countries Forum (GECF)--usually preferring to take a hands-off approach.
Sure, a handful of producers usually dance to their own tunes, adjusting production according to the prevailing market dynamics. For instance, Norway’s Equinor is able to optimize its domestic gas output by deferring production when prices dip too low.
Meanwhile, producers who do not use long-term futures contracts such as Egypt are forced to halt production when it stops making economic sense while others like Russia’s Gazprom are limited by how much their transport infrastructure can handle.
But nobody seems willing to give up market share with the three biggest producers--Australia, Qatar and the U.S.--still maintaining near-100 percent utilization rates even at these ridiculously low price levels.
Indeed, many producers are now stealing another page from the oil sector’s playbook: Storing huge amounts of the commodity in the high seas.
Bloomberg has reported that LNG floating storage clocked in at 17 late last month, but eased to 13 in April after some vessels unloaded their cargoes in India. Never mind that storing super-cooled gas for months on end is wasteful and expensive.
The “boil-off” rate is a big loss factor for stored LNG, with 0.07 percent to 0.15 percent on average evaporating from LNG tankers every day. But with land storage facilities rapidly filling up, these producers are finding themselves hemmed in between a rock and a hard place.
Proud Shale Succumbs
Maybe it’s time LNG producers learned a thing or two from U.S. shale producers.
Erstwhile proud shale producers are now acknowledging that these are highly unusual times, with a double whammy of a supply glut and severely depressed demand thanks to a crippling pandemic sweeping across the globe, hitting just about everyone extremely hard.
U.S. shale companies Chevron Corp. (NYSE: CVX), Devon Energy Corp. (NYSE: DVN), Marathon Oil (NYSE: MRO), Occidental Petroleum (NYSE: OXY), Cenovus Energy (NYSE: CVE) and Apache Corp. (NYSE: APA) have followed in the shoes of Europe's Big Oil including Royal Dutch Shell (NYSE: RDS.A), Italy's Eni SpA, French major Total SA and Norway's Equinor ASA (NYSE: EQNR) and announced a raft of deep capex cuts, share buybacks, and dividend cutbacks.
Even Whiting recently cut CAPEX by 30 percent in a bid to preserve liquidity. Whiting has a $770M bond maturing next year that was recently trading at just $0.24 on the dollar.
The biggest of them all, ExxonMobil Corp. (NYSE: XOM), was the last to bow to the pressure, but did it in style nonetheless. On Monday, XOM announced a 30 percent capex cut, good for $10B vs. 22 percent average cut by the sector with CEO Darren Woods lamenting:
“We haven’t seen anything like what we’re experiencing today.”
Like CVX though, XOM was able to save face by leaving the dividend intact.
Unless Trump gets his wish for Saudi Arabia and Russia to cut production by 10 million b/d or more, even the lowest-cost natural gas producers such as Russia, Qatar, and Norway will sooner rather than later be forced to eat humble pie, too.
By Alex Kimani for Oilprice.com
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