$10 Billion in Savings

Jim Brown
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I reported a couple weeks ago about the growing "fraclog" and the trend not to complete wells is accelerating. U.S. producers may have saved as much as $10 billion in the last few months by not completing wells.

IHS Cera said last week that as many as 3,500 wells have been drilled and not completed. Up to 1,400 of those are in the Eagle Ford shale. EOG Resources said in an earlier release that it would delay a significant number of well completions. Apache, Anadarko and Continental have all delayed completions as well. With well costs from $6.5 million to $8 million the producers are saving $3.25 to $4 million per well that they don't complete. If Cera's estimates of a fraclog of as many as 3,500 wells is correct that could be a savings of between $10-$14 billion.

Obviously this savings is temporary. Eventually the wells will have to be completed in order for oil to flow. When oil prices recover it will be easier for producers to raise money to complete the wells. Telling investors we have 1,000 wells that are ready to be completed and added to production should be a slam dunk money raising process. The investor risk at that point is minimal.

I am sure you heard that Royal Dutch Shell (RDS.A) is buying Europe's BG Group for $70 billion for the third largest energy acquisition ever. BG Group is very active in natural gas and LNG. The combination of the two companies will make Shell the largest LNG producer in the world. This acquisition will bring Shell very close to becoming the largest oil company in the world and kick Exxon out of the top spot.

Exxon shares declined on news of the BG/RDS deal. Investors were worried that Exxon might try to overbid Shell and take BG away. Exxon does not appear to be interested in that today. However, the BG deal probably stimulated Exxon to take another look around at the energy landscape and reevaluate their prior acquisition thoughts. While Shell appears to be focused on a wide array of global assets, Exxon is thought to be focused more on North America. The world is turning into a dangerous place and multiple U.S. companies have been struggling with production in places like Libya, Nigeria and even Egypt where social unrest is causing production problems.

Exxon is probably thinking they can pay a little more for some U.S. company and have safety in the rule of law and not have to worry about the government nationalizing their oil fields or having a neighboring country bomb them.

In the U.S. Hess (HES), Occidental Petroleum (OXY), Pioneer Resources (PXD) and Cimarex (XEC) are constantly rumored as acquisition targets. When the BG deal was announced the shares of Hess spiked $4 to $73 on the instant realization that they might be next. OXY is also up +$4 to $78.

OXY split off its problems in California last year and is now a cleaner company. However, it still has assets in the Middle East but it is trying to shed those as well. Abu Dhabi signed a $500 million deal with OXY last week to develop two oil fields. OXY owns a 30% stake in the two fields. The overseas component may keep OXY from being a top candidate for acquisition because of the uncertainty.

Hess is also a global exploration company but it is trying to refocus on U.S. assets. They are heavily involved in deepwater exploration in the Gulf of Mexico. Unfortunately they still have operations in Norway, Denmark, Iraq, Libya, Algeria, Ghana, Guinea, Malaysia, China and Australia. Several of those locations are obvious hot spots with potential challenges. Hess is also wide spread and that could keep Exxon from chasing those assets. However, Exxon has existing assets in all those same locations so maybe it would not be a challenge.

Pioneer Resources is totally focused in the U.S. but they may not be big enough for Exxon. Pioneer has operations in the Permian Basin, Eagle Ford, Rockies and West Panhandle. With only 11 billion barrels of oil equivalent and an enterprise value of $24 billion they may not be big enough to warrant the effort to incorporate them into Exxon's footprint. They ended 2014 with 201,000 Boepd of production with 48% oil. Exxon already has a huge gas component and gas prices are falling again. Exxon would probably like to acquire more oil resources instead of gas.

Nearly every producer has its own share of warts and beauty is in the eye of the beholder. Who Exxon thinks is attractive today is anybody's guess.

I wrote about the nuclear deal with Iran last week. Apparently there is no deal. The supreme leader of Iran came out with some strongly worded negatives last week saying they never agreed to intrusive inspections, inspections of military sites and all sanctions had to be lifted when the deal was signed. All of that is contrary to what President Obama said in his post deal speech. This weekend he has said if Iran does not agree to the prior terms he mentioned then there would be no deal.

We have about 80 days until the self imposed June 30th deadline and I would bet there will not be a deal, or at least an acceptable deal, before that deadline. The Arab countries are up in arms about the potential for Iran to have nuclear weapons in 10 years or less. Israel is also fired up about it and France seems to be resigned that no acceptable deal will be done.

For the oil sector that is a good thing since the sudden addition of another 1.5 mbpd of Iranian oil into the market plus the 30+ million barrels they have stored in tankers could knock about $15 off crude prices in a very short time.

Active Rigs

Active drilling rigs declined -40 to 988 for the week ended on Friday. Oil rigs declined -42 for the week to 760. Active gas rigs rose +3 to 225. Active rigs have now declined -943 since the high of 1,931 in September. That is a -48.8% drop. Active offshore rigs rose +2 to 33 and well off their January high of 60.

Oil Inventories

Crude inventories rose another 10.9 million barrels to 482.4 million and the highest level for April since 1931. Crude inventories have risen +99 million barrels over just the last 13 weeks. Inventories are 26% over year ago levels and 28% above the five-year average.

Refinery utilization rose to 90.1% last week from 89.4%. Imports spiked from 7.35 mbpd to 8.22 mbpd. U.S. production rose +18,000 barrels to 9.404 mbpd.

Cushing inventories rose +1.3 million barrels to 60.2 million and a new historic high. Cushing is now over 80% of capacity and the level where inflows are curtailed in order to maintain operational capability.

EIA Crude Inventory Chart

Gasoline inventories rose +0.8 million barrels to 229.9 million. Gasoline demand declined by -815,000 bpd and imports fell -183,000 bpd.

Distillate inventories fell -0.3 million barrels to 126.9 million. Demand rose +395,000 bpd. Imports rose +30,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.

Natural gas inventories rose slightly by +15 Bcf to 1,476 bcf. Inventories are now -10.5% below the five year average of 1,649 Bcf and +78.9% above year ago levels at 825 Bcf.

The gas heating season is now over and injection season has begun. Gas prices have declined to a three-year low at $2.49. I will no longer report on propane and natural gas levels until next winter begins.

The blue line in the chart below shows the current inventory relative to the five year average.


The market posted a gain last week and multiple indexes are nearing their historic highs. This is going to be a critical week for market direction with the beginning of the Q1 earnings cycle and the potential for some earnings disappointments.

Jim Brown

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