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Global Energy Advisory – 24th July 2015

Oil Market Update

Oil entered another bear market with prices down 20 percent since their June highs. Everywhere you look there are reasons to feel pessimistic. Iranian crude could come back online, adding around half a million barrels per day in production later this year or next. Iran will also sell off about 40 supertanker’s worth of crude sitting in storage.

But Iraq could pose another conundrum for oil markets. According to Deutsche Bank, Iraq’s oil output hit 4.1 million barrels per day in June, a surge from around 3.8 million barrels per day month earlier. Amid all the violence and instability, Iraq continues to post impressive gains in production.

Saudi Arabia also lifted output by 230,000 barrels per day in June, to a record high.

“On current trajectory, this downturn could become worse than 1986,” Martijn Rats, head of European oil and gas equity research at Morgan Stanley, wrote in an investor’s note this week. The depths of the current oil bust have surprised the investment bank. “We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that.”

U.S. oil production is taking longer to adjust than many anticipated, although debt is piling up throughout the industry.

All of this points to the possibility of deeper cuts to capital spending plans for the oil sector. “Oil companies are hunkering down for a downturn that will take longer than some initially thought.”

Regulations, Litigation & Licensing

• Lobbying to repeal the export ban on crude oil in the United States is picking up. Bloomberg reported that the number of companies lobbying on the issue jumped to 55 in the second quarter, almost double the number of companies at the same time in 2014, which stood at 30.

• The United Arab Emirates announced its decision to scrap fuel subsidies. As early as next month, gasoline and diesel prices will be linked to global prices, removing heavy state support that keep fuel prices low. Gasoline sells for as little as 50 cents a gallon in the UAE. The decision is part of the government’s effort “in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies,” the Minister of Energy said in the statement. According to IMF data before the announcement, the UAE was set to spend $29 billion on subsidies this year.

Deals, Mergers & Acquisitions, Asset Sales

• Petrobras, the partially-state-owned Brazilian oil company, is seeking to sell off more than $15 billion in assets in order to slim down and stop runaway debt. But its workers are not happy. Brazilian oil workers engaged in a 24-hour strike on July 24 to protest the asset sales. Petrobras has more than $120 billion in debt and has struggled to boost oil output despite ambitious pledges to do so. The oil workers union is trying to halt the new direction the company is heading in. The Brazilian congress is considering plans to allow private companies take the lead on oil projects in the pre-salt, something the union opposes. The union is instead calling for the full nationalization of Petrobras.

• Repsol SA (BME: REP) is mulling asset sales in order to trim debt. The Spanish oil company spent $13 billion to acquire Talisman Energy Inc., at a time when oil prices were crashing. To shed weight, Repsol is considering divesting itself of assets in Alaska, Bolivia, the Gulf of Mexico, and Venezuela. While no decision has been reached, it appears Repsol could sell off significant holdings.

• Encana Corp (NYSE: ECA) booked a $1.3 billion impairment charge in the second quarter, as low oil prices reduced the value of its assets. Encana reported a disappointing quarterly loss of $1.6 billion, with an operating loss of $167 million. Encana has already slashed its workforce by 25 percent, but in June the company said more job cuts are coming.

• Bucking industry trends, Precision Drilling (NYSE: PDS) plans on increasing capital expenditures for 2015 despite the ongoing slump in oil markets. Precision builds high-tech drilling rigs, and the company plans on boosting spending from $506 million to $546 million in order to build a new high-powered rig for oil sands projects in Alberta. In total, Precision will build 19 rigs this year. Still, the company reported a loss in the second quarter as demand for drilling has fallen off a cliff.

• Hercules Offshore (NASDAQ: HERO) expects to file for bankruptcy next month, and restructure its balance sheet. Hercules had already announced a deal with creditors in June that entailed a bankruptcy filing.

• Italian oil giant Eni SpA (NYSE: ENI) is looking at the possibility of asset sales in Nigeria. Details are not public, but Eni could sell between $2 billion and $5 billion according to Bloomberg. Worldwide, Eni expects to sell off $8.8 billion between 2015 and 2018. The largest oil companies are selling off assets to align their balance sheets with a lower oil price, and Nigeria has become an obvious place to start. Theft, violence, and corruption have made business difficult in the Niger Delta.

• Chesapeake Energy (NYSE: CHK) announced its decision to scrap its dividend for the third quarter in an effort to find savings. The move could save up to $240 million per year, which it will use to fund its spending program. Hit hard by current market conditions, Chesapeake has seen its share price drop by more than 60 percent. Adding insult to injury, Credit Suisse released a report this week, upgrading several names in the E&P sector. Chesapeake Energy was the firm’s lone downgrade, and Credit Suisse analysts said they saw little room for an upside.

Discovery and Development

• Statoil (NYSE: STO), along with its partner Total E&P Norge, announced a gas discovery in its Julius prospect in the North Sea. The 2/4-23S well holds gas and condensate in the Ula formation, potentially holding between 15 and 75 million barrels of recoverable oil equivalent. Statoil also assessed its previously discovered King Lear field, which the company concluded is holding 70 to 200 million barrels of recoverable oil equivalent.

• Royal Dutch Shell (NYSE: RDS.A) and its venture partner Petromanas (CVE: PMI) bid on two onshore oil blocks in Albania, blocks that also received two other bids, one each from Delek Group Limited (TLV: DLEKG) and Interland Investments SA. Albania has seen a recent uptick in interest from oil companies in recent years.

• ExxonMobil (NYSE: XOM) announced that its Liza-1 discovery off of the coast of Guyana could hold as much as 700 million barrels of oil equivalent. The find could be worth as much as $40 billion, more than 12 times the entire GDP of the country.

• Eni announced a natural gas discovery in Egypt. The find in Western Abu Madi could hold as much as 15 billion cubic meters of natural gas. Recent pricing reform by the Egyptian government will also boost the value of Eni’s assets.

Latest 2nd Quarter Earnings

• Cabot Oil & Gas (NYSE: COG): Q2 EPS $0.03

• Encana (NYSE: ECA): Q2 EPS -$0.20

• Precision Drilling (NYSE: PDS) Q2 EPS $-0.10

• DTE Energy (NYSE: DTE) Q2 EPS $0.76

• FMC Technologies (NYSE: FTI) Q2 EPS $0.52

• Baker Hughes (NYSE: BHI) Q2 EPS -$0.14

• Halliburton (NYSE: HAL) Q2 EPS $0.44

• Weatherford International (NYSE: WFT) Q2 EPS -$0.10

• Oceaneering International (NYSE: OII) Q2 EPS $0.76

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