Insights From The Oil Patch

posted in: Charts | 0

If I didn’t know better I could have never guessed that crude oil is down nearly 50% in less than a year. The Houston real estate market is white hot with residential listings regularly going for above asking price and sellers are finding eager buyers in a matter of days. Houston also has extremely low housing inventory with a meager 7 weeks of supply on the market (5-6 months of supply is what a normal market typically looks like).


 There is a substantial amount of new construction occurring in downtown/midtown Houston as developers look to bridge the supply/demand gap.

The nightclubs in midtown (the young trendy area near downtown) are jam packed on Friday and Saturday nights with a noticeable imbalance of males to females (about 2 men for every young lady). This is probably due to the heavy engineering focus in Houston business.

After spending a week in Houston and having numerous conversations with “company men” and executives for some of the world’s largest oil firms as well as spending a day at the Morgan Stanley Energy Conference here are my key takeaways in no particular order:

  • A reduction in OPEC production is unlikely over the near term – the Saudis are hiring laid off workers from the Texas fields indicating that they have no plans of reducing production.
  • Improved completion techniques and fewer drilling days have reduced costs substantially.
  • There is a great deal of hedging taking place at $65/barrel in the forward months.
  • With producers needing to raise capital and meet debt covenants there is ample potential for further curve flattening (backwardation) over the coming months as producers sell forward production in order to lock in cash flow.
  • The major integrated E&Ps are cashed up and still very profitable even at $60/barrel; a serious crunch likely wouldn’t occur unless there were to be a protracted period of sub-$50 oil prices.
  • Big US oil firms are chomping at the bit at the prospect of moving into deeper water in offshore Mexico; Mexico has long underinvested in its energy infrastructure and there is tremendous potential for some mega oil reserves to be discovered in deeper waters off Mexico. (Chevron upper management met with top officials from Mexico last month….)
  • US intervention in Iraq against ISIS coincided with the first substantial threat to Kurdish oil supply – Kurdish oil fields are now extremely well protected and at virtually zero risk. Numerous US oil firms are operating in Kurdistan.
  • There remains a great deal of uncertainty with regard to the future direction of oil prices, estimates ranged from $40-$50 to $80-$90 and this lack of consensus shows up in wide bid/ask spreads on the vast majority of oil & gas assets out there for sale.
  • It’s been rumored for a couple of years and perhaps even longer, but there were more rumblings of a potential Exxon (XOM) buyout of Anadarko (APC) which would give XOM the offshore presence it has not had for so long.
  • Exploration budgets have been slashed but changes in royalties could catalyze some activity and lower costs for non-US projects.
  • ‘Peak Oil’ is a joke, there is an ocean of oil out there, it’s simply a matter of how much people are willing to pay for it.

In summary, the US oil industry appears to be alive and well. Firms are planning for the long term and focusing on getting lean, however, there isn’t even a touch of panic in the air that perhaps this downturn in energy prices is here to stay…if anything, the opposite is true.