RJ: "Low Oil Prices Cure Low Oil Prices"

[dan_s]

How much further will budgets fall?

Many of the reductions we have tracked thus far were largely made in the initial fallout of $35 WTI in 2020. In the past two weeks, oil prices have
dipped as low as $20/bbl, and as we discussed, 2Q20 will remain challenged with oil inventories filling globally. Thus far, we have already seen two
large E&Ps re-announce a lower capex budget after their initial reductions. We expect this trend will continue. When the dust settles, we expect
total U.S. upstream spending will fall 50% y/y under the base case scenario, and in excess of 65% under the bear case, lowest-seen WTI scenario.

To address the Majors (keeping in mind that Exxon and Chevron are ~80% of this group's activity), we currently expect activity will be down 30%
on a y/y basis. While this is a lower headline cut than other groups, it is still a deep cut relative to our previous expectations as we had previously
expected that this group would actually increase spending in 2020. Many of the majors, Exxon in particular, were set to increase activity on their
large U.S. shale assets. While these companies are less financially constrained than other operators, the short-cycle economics are still not much
different. As such, there is not a lot of incentive to produce in these conditions as they are better suited to defer production, despite having deeper
pockets.

Not surprisingly, Private operators will see the largest activity reduction in our forecast, due to capital constraints and a greater cash flow
sensitivity. As capital markets have cried up to small cap E&Ps (really almost all E&Ps now), P.E. backed operators have quietly shifted to the same
free cash flow model seen in the public space given the lack of traditional exit opportunities. Additionally, there is the large class of self-funding
E&Ps who drill within their own cash flows. While they are a relatively small piece of total U.S. activity, they are liable to cut activity to almost
nothing in this environment at either of our cases, be it $35 or $25 WTI.

If you'd like to read the full Raymond James report this came from, send me an email dmsteffens@comcast.net
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MY TAKE: Even companies with a high percentage of their oil hedged will slash drilling budgets. Why? because it is stupid to complete new horizontal wells in a low oil price environment. Any production above the volume of oil the company has hedged will be sold at market prices. There are no areas of the shale plays were well level economics are profitable at $25/bbl WTI and only a tiny few where wells are profitable at $30/bbl. That said, upstream companies with very strong balance sheets (like EOG and PXD) will look at drilling wells and not completing them because it might make sense because the drilling rig companies will offer super low dayrates just to keep some revenues coming in. If the Good Lord allows us out of "Crazy Coronavirus World Hell" this summer, the oil price might bounce back a bit. The longer this goes on, the higher the risk of an oil shortages a year from now because once the oilfield services sector has been crushed, it will take time to rebuild.

[dan_s]

In "Crazy Coronavirus World" there might be hope for the "gassers". When I say "hope", I'm talking about when the next winter heating season rolls around. The reason the natural gas prices in North America are below $2.00/mcf has very little to do with the virus or the Saudi Arabia vs Russia oil price war.

The low natural gas price was caused by the flood of associated gas coming from oil wells in the Permian Basin and the other oil basins (DJ, Bakken, Eagle Ford, Powder River) and the mild winter.

The number of rigs drilling for gas has been way down for months already and it won't increase until HH gas pushes over $2.50 at least.