Bakken Wall Street Coverage

E&P analysts share perspective on low oil, activity levels and future expectations. We spoke with analysts based in Denver and Houston to learn what investors think of the current oil market.
By Luke Geiver | October 20, 2015

For the latest oilfield catchphrase, talk with an energy equity analyst. From their offices in Denver, Houston or London, they can explain the truth behind the dead cat bounce, the DUC or the most recent term linked to oil production in the low price environment: lower for longer.

To deliver the level of insight and descriptive analysis on the exploration and production sector, midstreams or the energy service firms that they are tasked with covering for internal or external investor clients, analysts have to know the complexities of the industry and more importantly, how to talk about it with energy CEOs and hedge fund managers alike.

To hear them in action, listen to any quarterly financial update from any Bakken-based E&P. To understand their individual perspectives  and what they talk about with clients regarding  oil prices, production activity and the key to keeping investors happy, we talked with analysts from Denver, Houston and a group of industry veterans that recently formed a finance and marketing service for those companies in need of private capital.

Lower For Longer Explained
Since the time Daniel Guffey, vice president of equity research for oil and gas exploration and production at Stifel Nicolaus, first started covering the E&P space in 2007, the industry has completely changed. “There has been a big step change,” he says. The change has occurred in every facet of the shale space including technology, economics and managing style. In the past 18 months, for example, Guffey says operators have moved to slickwater fracks as a strategy to increase production. Drilling and completion times have decreased, resulting in more efficient and economic operations. Boardrooms are now pondering the finance of future production through cashflow instead of debt, he adds. This evolution of the industry has altered the breakeven prices for many U.S. shale plays, including the Bakken.

“You don’t need $80 or $90 oil to make the plays economic,” Guffey says. “At $60 now, most of these companies are making money.” For every entity linked to the shale space, those should be welcome words. Current oil price predictions point to the end of 2016—possibly sooner, or later—as the time when price fundamentals balance and the demand for oil once again outpaces demand. The rebalance will drive oil price back above $60, predictions show, but until then, analysts have now turned to the term “lower for longer” to describe what everyone should expect from the oil markets in the U.S.

The term holds meaning for producers and analysts each. For the production community, the term explains how analysts describe the mindset of E&Ps. “Companies are getting leaner, overhead is shrinking. They are all getting more efficient as a whole,” Guffey says. “That will help them drive better returns for investors and allow them to stay competitive in a low price environment.”

Jason Wangler, senior vice president and equity analyst from Wunderlich Securities, mimics Guffey’s sentiment. “A lot of folks are highgrading their assets and finding a way to hunker down and get through the downturn,” he says. By now, operators have changed their strategies due to the high-probability that oil prices will not rally for the next few quarters.

The idea, as Wangler and Guffey explain, is to remain relevant knowing that oil prices are going to say low for the next few quarters.

Earlier this year, Wangler explains, “There was an idea that there would be a V-shape curve where oil would be down for a bit but we would pop back up and the second half of 2015 was going to be fantastic. Now the phrase lower for longer is a phrase that is being thrown around a lot.”

Following a brief rally in June, oil prices once again dipped. “When we saw the price go upwards of $60 we saw operators put rigs back to work. That rally was shortlived,” Guffey says. Most believe the dip was a true sign that the global oil markets are out of balance.

What Investors Want
“The investor perspective has ebbed and flowed,” Wangler says.

At the beginning of the year there was strong interest and a high volume of money being infused into the oil and gas industry, he says. Successful equity raises in April by several firms proved that.

Today, the energy shops and hedge funds that Wangler talks too say they are underweight in energy because it is an “ugly space,” with too much uncertainty right now.

“I would say the interest is still really high and it is as high as it was several months ago, but the actual capital being deployed is much lower,” Wangler says.

Investors that are active in the shale space do have particular desires. The collective mood from investors has been to stick with those entities that have good balance sheets, Guffey says.

From producers, investor clients of Wangler’s want to see production stay flattish throughout 2015. “Being able to do that within cashflows and use outside financing is important,” he says. “I think that is about as good as you could do right now. You can hunker down, you can see production at flattish levels and when you get out of this you can see production growth when a rally does come.”

In today’s market, Guffey says, “a strong balance sheet has gone from being a premium to being a necessity if you want your stock to hold up.”

Despite the best balance sheet maneuvers and strategies, some investors are not willing to play in the shale space. “From an investor standpoint, a lot of it has to do with the stability of the commodity,” Wangler says. But, when oil prices do stabilize, things could change quickly. “A lot of folks are saying that when this comes out they will have their pocketbooks ready.”

Analyst Predict Activity
Like most analysts that cover the oil industry, Guffey believes the balance needed to stabilize oil prices will not occur until 2017. Excitement amongst investors will happen well before that balance actually occurs, however. “You just need a line of sight about the balance and the price at which it occurs,” he says. When that balance is in sight, many investors—along with producers—will make moves to become active in the space again. “U.S. production has been the lever that has been pulled shut the quickest,” he says of global oil production. “It will also come back the quickest.”

Wangler believes oil prices have to be significantly higher to maintain global supply, and, that OPEC will eventually refocus on making money and abandon its moves to defend marketshare. “They don’t produce corn or export goods,” he says. “Oil is what they do.”

Neither Wangler or Guffey believe drilled but yet to be completed (DUCs) wells will add enough production to the North American totals once they are completed. And, the possibility of exploration in emerging basins is unlikely, even when a price rally takes place.

“Even without going and finding new basins, there is a lot of potential to go out and recover more oil within your basin,” Guffey says. “It is not traditional exploration. It is about doubling your resource potential.”

When a price rally does occur, Wangler is not concerned with the availability of capital to producers in need of fixing balance sheets or paying for new production. That reality shows the true nature of the shale space and why he and his clients are anxious for the impending activity ramp-up and resurgence of the industry. “There is still plenty of energy,” he says. “Energy is always an exciting space.”

Author: Luke Geiver
Editor, The Bakken magazine
701-738-4944
lgeiver@bbiinternational.com

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SIDEBAR

Company For Current Conditions
A team of industry veterans made up of former Goldman Sachs representatives and crude marketing and logistics experts have formed a new company that links the financial backing of Wall Street with the industry knowledge of Houston. HudsonField—Hudson referring to New York City’s Hudson River and Field referring to the oilfield—is the brainchild of Ben Freeman, Scott Bormaster and a handful of others. The new firm has experts well-suited to work with oil producers in need of help due to the current oil price environment.

According to Freeman, the company can provide financing to any production entity looking to pay down existing debt or drill new wells. It can also provide hedging expertise or market crude.  “We see financing as a very important tool we can engage our clients with,” Freeman, CEO and former Goldman Sachs managing director and global head of oil derivatives trading, says. “A really important point for our business is that we are client aligned. We are not in the upstream business,” he adds. “Low sustained oil prices for the better part of this year means our services are more in demand than if oil was trading around $100.”

Scott Bormaster, president of marketing and transportation and former vice president of oil business development for Buckeye Partners LP, has an example of how HudsonField’s expertise can shine during the current price cycle. By working with clients in any of the major U.S. basins, Bormaster believes he has the chance to save them transport costs due to infrastructure upgrades, additions and space allowances that weren’t present until recently. In the Bakken, rail will give way to pipeline, he says. Some major pipelines currently have free space, giving producers who can find a way to tap into that unused capacity an economic alternative or in some cases, an advantage, even if the profit from switching between rail or pipeline is small. “At $100/b, producers don’t care much about a few pennies. When it is $40/b,” Bormaster says, “every penny counts.”