Falling U.S. Oil Production coming soon

[dan_s]

Note below from John White at Roth Capital 3-30-2020

Forced Shut In Oil Production on the Horizon? < There will also be shut-ins of fields that go cash flow negative. I've not seen much on this topic, but Raymond James did mention it in a recent report.

As the oil industry faces: 1) an escalation in supply from Saudi Arabia and Russia, 2) a severe decline in demand from economic shutdowns due to the coronavirus, it is increasingly reported that physical storage capacity for crude oil, on land and on tankers at sea, will be filled in short order. This is a situation the oil industry has not faced before. In previous periods where oil production was shut in it was typically due to low oil prices that resulted in uneconomic production.

As reported by the Houston Chronicle on 3/29/2020, pipeline operators with full storage tanks are asking some Texas oil companies to stop production. In a Saturday morning tweet, Texas Railroad Commissioner Ryan Sitton, one of three officials elected to oversee the state agency that regulates the oil and gas industry, reported that some oil companies are getting letters from shippers asking for production cuts because they are out of storage.

The consequences for cash flow are obviously negative, particularly for the more leveraged E&P companies. We have attached our relative value tables and ranked the companies by Debt/2020 EBITDA for your reference. Regarding force majeure remidies for borrowers, we corresponded with two corporate finance lawyers who specialize in oil and gas and we were told these clauses are not available as a remedy for interest and principal payments. One of these sources offered his opinion that he believes banks will work with leveraged companies adversely affected by forced shut in oil production to avoid widespread credit problems.

As previously announced, the Department of Energy intended to purchase $3 billion of American crude oil to fill the Strategic Petroleum Reserve (SPR). This initiative was contingent on the availability of funds from Congress, however this proposal was not included into the final CARES Act, which led to the Department of Energy abandoning the March 19 solicitation to fill the SPR.

Now with it seemingly certain that physical storage limitations will force the shutting in of certain volumes of oil production one option for this issue might be to allow U.S. based oil producers/pipeline companies to use the SPR as a storage facility. We learned of this from one of the corporate finance lawyers we corresponded with who informed us he had suggested this to the Independent Petroleum Association of America, a trade group for U.S. E&P companies, who will in turn contact the Department of Energy.