Double Crown Resources Inc. (fka DDCC)

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Signs point to recovery
May 18, 2015

Corey Paul | Odessa American, Texas

Link:
http://eaglefordtexas.com/news/id/152294/signs-point-to-recovery/

Oil prices tick upward. The drop in rigs drilling in the Permian Basin continues to flatten. And some observers expect the worst of the layoffs are over.

Meanwhile, some of the biggest drillers in the region, Pioneer Natural Resources and EOG Resources, announced plans in the past two weeks to start drilling soon, dependent on price stability and other factors.

But there are a number of factors analysts and oil company managers watch that could undermine that recovery. The main ones: production, demand for crude oil, storage capacity and activity of the Organization of Petroleum Exporting Countries. “They are massive overhangs,” said Joseph Triepke, a financial analyst from Odessa and managing director of Oilpro. com. “Oil cannot go to $100 a barrel. One of those three things will break (and) that will prevent a nice recovery and any sort of boom again.”

The Permian Basin is the most active oil basin in the country, despite losing half its rigs since the peak of November. There were 233 rigs running in the region on Friday.

But the past two weeks saw producers issue a series of optimistic outlooks as prices steadily rise. The national benchmark grew by about 36 percent since mid-March. The regional Plains-West Texas Intermediate benchmark ended at $56.25 per barrel on Friday.

Many of the fundamentals that halved prices since the peak of June 2014 remain in place, such as oversupply.

Analysts with the investment bank Goldman Sachs this week issued a note to investors estimating that the global market for crude will stay oversupplied this quarter by about 1.9 million barrels a day, warning that they view the price rally “as derailing this rebalancing and setting the stage for squentially weaker prices.”

If producers start drilling and completing more wells, the resulting production growth could cause another price drop if demand does not pick up, said Sandy Fielden, an analyst with RBN Energy in Houston.

“There’s obviously a strong desire in the drilling community to think that ‘Hey, we’ve weathered the storm and things are back on track,’ ” Fielden said. “Whether that really happens kind of depends on a pickup in demand. Some of that build has to get burned off by refining, not just here but in other parts of the world. Even if it’s just in the U.S., that’s not really enough to have a big impact.”

In the Permian Basin, there is also concern about crude stockpiles. Pioneer Natural Resources executives cited that as one factor that could influence plans announced in a May 6 conference call to start adding two rigs a month beginning in July.

In related news, EOG Resources to resume fracking if oil hits $65/barrel.

Analysts with the Louisville-based firm Genscape say storage could lead to price shocks in the region, even though the glut seems less severe than it did as supplies continued to build a month ago.

The storage hub where national benchmark oil prices are set in Cushing, Okla., remains near capacity at 80 percent, according to Genscape. The storage hub in Midland is at about 70 percent, according to the firm.

“It’s not so worrisome as it looked like, but there is potential for worry,” said Hillary Stevenson, an analyst with Genscape, citing continued production growth, changes in refinery demand and pipeline maintenance as factors to watch. “They are basically hovering around their max.”

The price slide began in June amid signs of weaker than expected demand coupled with growing supply, but the slide became a freefall in November with OPEC’s Thanksgiving Day decision not to boost prices by cutting the cartel’s production quotas. That was widely seen as an effort to curb U.S. shale output.

Increasing or continuing high production from OPEC and other non-U.S. producers could derail the forecast recovery, said Ray Perryman, the Odessa economist who runs the Perryman Group.

“Fluctuations are inevitable in both directions,” Perryman said. “But the trend for the next 12 to 18 months should be positive.”

Oil traders watch the rig count for signs that shale production in the United States will decline — one reason, along with an uptick in demand, that oil prices have climbed as they have.

But the decline in United States’ crude production has so far been marginal, according to the Energy Information Administration, which reports the country dropped about 130,000 barrels a day in the month of April to about 9.37 million barrels per day on May 1.

The EIA still expects Permian Basin production, now more than 2 million barrels a day, to grow. But the agency forecast that growth to steadily slow, adding 7,000 barrels a day from May to June down from 11,000 barrels a day from March to April.

“Yes, we’ve lost a lot of drilling rigs,” Fielden said. “It hasn’t had a lot of impact on production. Next year maybe we’ll see how long the cycle takes to unwind. It’s a na?ve opinion that it’s all going to be overnight.”

But the slowdown in Permian oil production could be enough to satisfy investors and keep regional prices in line with the rest of the country, said Ben Shattuck, an analyst with Wood Mackenzie in Houston, a firm projecting a rig count bottom around June before a gradual recovery begins.

Wood Mackenzie analysts also see the storage situation as unlikely to derail a recovery.

“It’s being stress tested but we think it passes the test,” Shattuck said.

That is not to say such factors won’t cause oil prices to yo-yo in the coming months, as observers look for the stability that producers need to plan a recovery, Shattuck said.

“Don’t expect it to be a steadfast stabile type environment,” Shattuck said. “You are going to have a lot of data rolling in that has a lot of eyes on it, and there will be things that shouldn’t affect the price that do.”

None of this is to say the second half of the year looks as bad as the first half, a period marked by rapid reductions in activity and mass layoffs. Pinning down how many jobs the region lost proves difficult, because few companies offer regional breakdowns, and labor data lags months behind layoffs, workforce officials say. But Permian Basin Workforce Solutions now estimates “6,000 or 7,000? jobs lost in the region based on unemployment claims, CEO Willie Taylor said, who expects a more detailed account in the coming weeks.

Amarillo economist Karr Ingham, who studies the Odessa and Midland area along with the Texas oil industry, projected job losses of about 17,000 between the metro areas, based on unemployment during the 2008 oil bust.

Layoffs will likely continue, but probably the sorts of mass firings in the 10,000-person range are probably over, unless prices drop again, several analysts said.

“There probably is going to be some more left before things turn around,” said Allen Gilmer, CEO of the Austin-based analytics firm DrillingInfo. “But right now people have kind of made the moves they are going to make.”

If indeed the recovery is not a false start, Gilmer points to some ways the downturn could leave the Permian Basin oil industry better off than before. Those include savings on service company costs in the 30 percent — which stemmed from oil company pressure that ultimately meant headcount reductions.

Margins oil companies make today through those savings, and with other ways operators have found to reduce cost, are comparable to when oil was at $86 per barrel, and that sort of cost cutting does not turn around quickly, Gilmer said. “I don’t think that anyone was claiming six or eight months ago, that this industry in every way shape or form was operating as a well oiled machine, that it was optimized,” Gilmer said. “No one was really doing great work. Everyone was just doing a lot of work.”

Contact Corey Paul on Twitter @OAcrude on Facebook at OA Corey Paul or call 432-333-7768.