oilgas

Oil & Gas Market Trends

Industry Insight

COVID-19 Industry Brief

EFFECTS OF THE CORONAVIRUS ON THE Oil & Gas INDUSTRY Update June 18, 2020

DOWNHOLE TOOLS AND E&P EQUIPMENT AND INVENTORY

  • Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline.
  • Oil Market Capital Expenditure Falling: As of the week of March 28, 2020, the North American oil majors had slashed 2020 exploration and production (E&P) budgets by 30 percent to 40 percent (on average). Year-to-date active rig counts were down 28 percent through the end of March and are expected to continue dropping.
  • Market Sentiment: Values for downhole tools and assets related to oil field E&P will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand.
  • Industry Fallout: Several large operators in the space (Transocean, Nabors Industries, and Superior Energy Services) collectively have $7.0 billion of debt set to mature over the next two years. Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oil patch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020 as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company had retained bankruptcy counsel, possibly in preparation of a new filing, or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based E&P company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection, in mid-June.  According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. Energy research firm Rystad Energy, based in Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020.
  • Liquidation Market Happenings: Gordon Brothers has recently seen activity in this space and proposed an orderly liquidation of an oil and gas servicing company, Tri-Point Oil and Gas Production Systems.
  • Valuation Outlook: Gordon Brothers expects that secondary market demand for anything other than ongoing well-servicing equipment, such as lift equipment or other niche sectors, will be severely depressed for as long as this price environment lasts.

DOWNHOLE TOOLS AND E&P EQUIPMENT AND INVENTORY

COVID-19: Industry Brief Meter - Oil & Gas - Downhole Tools

MIDSTREAM AND UPSTREAM

  • Oil & Gas Market Conditions: West Texas Intermediate crude oil at $22 to $24/barrel and at single digits in Alberta, Canada (Western Canadian Select at $4.18/barrel on March 30, 2020), makes almost every oil play unprofitable in North America with the exception of a minimal number conventional plays.  Assuming no governmental intervention, this will materially reduce new drilling activity to near zero within three to six months, potentially reduce existing production in western Canada, and delay completion on many already drilled wells. 
  • Market Sentiment: Midstream activity in the near- to mid-term will likely be stable, given that oil and natural gas wells will still flow for several years. However, fall-off is expected over the next few years, assuming that the current pricing environment does not move.  
  • Market Drivers: It is likely that pipeline construction activity will be somewhat insulated due to the backlog of pipeline projects currently underway.  Compression-related assets will likely be impacted less than production assets and the low price of natural gas will likely support further demand in this space from electrical power generators. 
  • Valuation Outlook: From an appraised value perspective, most of the assets Gordon Brothers sees in this space are machinery and equipment.  We would expect that secondary market demand will be weak, and the medium-term outlook will be weaker in the COVID-19/Saudi-Russo price war environment due to an anticipated future reduction in natural gas production volume.

MIDSTREAM AND UPSTREAM

COVID-19: Industry Brief Meter - Oil and Gas - Mid- and Upstream

OCTG

  • Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline.
  • Oil Market Capital Expenditure Falling: Through April 2020, the North American oil majors had slashed 2020 Exploration and Production (E&P) budgets by an average of 30 to 40 percent from 2019 levels.
  • Oil Country Tubular Goods (OCTG) Production Closures: U.S. Steel idled tubular operations indefinitely at its facilities in Lone Star, Texas, and Lorain, Ohio on March 24, 2020. Tenaris S.A. similarly announced a suspension of operations at two plants in Koppel and Ambridge, Pennsylvania, affecting 560 workers. Texas Steel Conversion, an oil country tubular goods (OCTG) processor and drill pipe manufacturer sent Worker Adjustment and Retraining Notification (WARN) Act notices to all 491 employees who work at five facilities throughout Texas on May 29, 2020. These facilities were producing various products but had a heavy focus on OCTG. The WARN Act requires that employers provide at least 60 calendar days of advance notice of any mass layoffs or plant closings.
  • Tariffs: A favorable ruling was released by the Department of Commerce on April 9, 2020, regarding an affirmative final determination in the antidumping duty investigation on imports of oil country tubular goods from China. This resulted in a final dumping rate of 29.86 percent to 99.14 percent for multiple Chinese OCTG importers.
  • OCTG Pricing Trends: The U.S. OCTG market flattened in June 2020 after two consecutive monthly drops indicating that the recent supply cuts were at least partially offsetting the demand loss. The monthly S&P Global Platts domestic OCTG assessment remained flat as of June 1 with import prices dropping by 1.4 percent. PipeLogix reported a decline for the month of May 2020 of 4.9 percent based on its index of 62 individual OCTG products. Despite recent increases in oil prices, sustainability of the pricing uptrend is still being questioned by U.S. oil producers, reducing market sentiment.
  • Market Sentiment: Distributors’ sentiment (as measured by PipeLogix) in the OCTG space turned sharply lower in March 2020 to 24, signaling a significant market contraction; it has hovered at these low levels through May, hitting 22 in April and rising slightly higher to 25 in May. New orders were practically non-existent for all distributors, and the price outlook score was very weak, with unsold inventory levels growing. Seventeen straight months of declining prices, tariffs, and depression-level impacts on demand are having a crushing impact on this sector.
  • Bankruptcies: Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oilpatch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020, as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company retained bankruptcy counsel, possibly in preparation of a new filing or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based exploration and production company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection in mid-June. According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. In addition, Rystad Energy, an energy research firm based out of Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020.
  • Market Outlook: Values for downhole tools and assets related to oil field exploration and production will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand.
  • Valuation Outlook: Concerning appraisal values from an inventory perspective, Gordon Brothers expects a material drop in tier I volumes. Tier II is expected to be limited to low volumes due to market conditions and a weak structural market. Scrap is expected to be negatively impacted based on market weakness. Equipment values in this space will be similarly impacted.

OCTG

COVID-19: Industry Brief Meter - Oil and Gas OCTG

Content Divider

 

Date April 2020

Projected Values - Oil & Gas

 

Current Trends

  • Crude oil prices as reported in Cushing, Oklahoma decreased by about 50% in March 2020 after oil production negotiations broke down between Russia and Saudi Arabia and briefly reached negative levels in April as storage levels reached capacity.
  • Oil and gas demand has been suppressed by an estimated 30% due to the impact of the coronavirus pandemic on the economy.
  • The North American rig count was down 53.4% as of April 24, 2020, over the same period last year reflecting the cratering demand levels evident in the oil service industry.

 

Gordon Brothers by the numbers

Synopsis

 

Volatility across the industry: Over the course of 2019, factors began to indicate a downward trend and change in the energy space. Funding for smaller exploration companies and oil operators began to dwindle. This created curtailments in drilling budgets and projects among the smaller oil operators. With the cutbacks in these operations, exploration and drilling has been negatively affected. Halliburton announced closure of its El Reno field office in early December 2019. This closure included a layoff of 808 employees and was directly related to reduced activity levels in Oklahoma and the greater mid-continent area.
 

Additionally, in the fourth quarter of 2019, Schlumberger began a strategic review of its North American land market operations as a result of operators curtailing, or ceasing, operations earlier than in 2018. After reviewing its market position, strengths, technology, and opportunities with customers, the company will decide whether to reduce its portfolio to fit one or multiple basins. The company also hinted that divestiture of its pressure pumping assets could come at some future date per reporting by Rigzone Daily News. Some operators have begun the process of idling and scavenging equipment used in fracking. Other frac companies have scavenged equipment and/or sold units for scrap. This is a different scenario from previous slowdowns in which companies parked equipment to await recovery in demand.
 

In addition, the appearance of the coronavirus has essentially created a global slowing and transition of business activities. With employees and consumers working from home, along with curtailed business and recreational travel, the consumption of gasoline, diesel fuel, and aviation fuel has slowed dramatically. This has created a further drag on crude oil prices.
 

Active rig count decline: The North American market saw a steady decrease in rig activity throughout 2019 due in part to the decline and volatility in the price of crude oil along with funding problems for smaller operators. Baker Hughes reported that the North American rotary rig count as of April 24, 2020 had declined to just 491. This count takes into account rigs in the United States, Canada, and the Gulf of Mexico.
 

Taken together, North American rigs drilling for oil are down 53.4 percent from the same period one year ago. As of April 24, 2020, there were 438 fewer North American rigs drilling for oil than for the same period in 2019. Despite changes in the oil and gas industry, particularly since the shale oil and natural gas industries have ramped up production in recent years, active rig counts can still signal the willingness of oil and gas companies to continue investing. Per oilfield truck and tractor manufacturer Tiger General, rig counts can also anticipate a demand for products used in the oil service industry, such as drilling, producing, and processing hydrocarbons.
 

Declining oil price and current appraisal consideration: In the days leading up to March 6, 2020, Saudi Arabia and Russia engaged in talks targeting an increased cutback in oil production, which began in 2016. The increased cutback was intended to offset the decreased demand resulting from the coronavirus outbreak. However, the talks ended in failure and resulted in a price war primarily involving the two countries. The price war was settled on April 12, but the market has not reacted well to the settlement, which outlines a deal to cut oil production by 9.7 million barrels/day from May 1 to June 30, 2020, then by 7.7 million barrels/day from July 1 to December 31, 2020, and finally by 5.8 million barrels/day from January 1, 2021 to April 30, 2022. At the same time, with the spread of the coronavirus and the impact of the COVID-19 pandemic worldwide, oil consumption forecasts have been adjusted downward by 20 to 30 percent for 2020. Consequently, crude oil prices have fallen precipitously, with prices falling to below $20 per barrel for WTI crude in late March and again on April 15, 2020, and then reaching negative levels briefly on April 20, 2020 as the market attempted to find a supply and demand balance as storage locations both in Cushing, Oklahoma as well as throughout the rest of the world reached capacity.
 

Declines in the price of and demand for oil are likely to affect assets directly related to exploration adversely. Therefore, lenders with oil and gas assets in their portfolios will need to keep a watchful eye on crude oil pricing along with world factors that could influence market participants. Lenders with oil and gas assets that have not been valued during the past six months may want to consider a new appraisal. This effort may identify previously unrecognized changes in exposure and better position lenders to make appropriate decisions regarding changes in loan structures.
 

Until these economic conditions change, the value of high-cost specialized assets, such as those utilized in oil and gas exploration and production, will remain volatile and trend downward in recovery value.
 

Impact on oil country tubular goods and other inventory- related assets: U.S. Steel idled tubular operations indefinitely at its facilities in Lone Star, Texas and Lorain, Ohio on March 24, 2020. Tenaris S.A. similarly announced it would suspend operations at two plants in Koppel and Ambridge, Pennsylvania, affecting 560 workers. These facilities were producing various products but had a heavy focus on oil country tubular goods (OCTG).
 

As of the week of March 21, 2020, the North American oil majors had slashed 2020 Exploration and Production (E&P) budgets by about 30 percent on average. Distributors’ sentiment, as measured by Pipe Logix, in the OCTG space turned sharply lower in March 2020 signaling a significant market contraction. As of late March, new orders were reported to be down by all distributors and the price outlook score was very weak. After 15 straight months of declining prices, tariffs, and depression-level impacts on demand will have a crushing impact on this sector.
 

Asset values for downhole tools and assets related to oilfield E&P assets will also be at depression levels while the impact of the coronavirus is still weighing on worldwide demand and the Saudi-Russian price war continues. The latest downturn, though materially affected by the virus, may prove to be long lasting when coupled with the Saudi-Russia price war, as prior OPEC price wars have lasted 12 to 24 months. In addition, the current level of production, though being reduced worldwide in various regions, is currently materially higher than demand. This is resulting in significant levels of excess crude buildup, to the point where worldwide storage is expected to be filled to 100 percent capacity at some point in the second quarter of 2020.
 



Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
 

Reference sources: Baker Hughes, Energy information administration, WTRG Economics, tiger general, rigzone daily news, pipe logix