Energy Prospectus

Weakening crude oil prices will cut exploration and production spending by independent producers in the US next year and make integrated oil and gas companies wary of upstream projects dependent on a price of $80/bbl, according to Moody’s Investors Service.

The company, which analyzes credit conditions in the industry, lowered its price assumptions for Brent crude to $80/bbl through 2015 and $85/bbl in 2016 and for West Texas Intermediate crude to $75/bbl in 2015 and $80/bbl in 2016.

The projections represent cuts from earlier assumptions for both crudes of $10/bbl next year and $5/bbl in 2016.

Moody’s left unchanged its assumptions for the Henry Hub spot price for natural gas of $3.75/MMbtu in 2015 and $4/MMbtu in 2016.

Full article: http://www.ogj.com/articles/2014/11/moo ... mber252014

MY TAKE: It is premature to forecast oil prices until we hear from OPEC this week. HOWEVER, the good E&P companies (like those in our Sweet 16) will be fine at the oil & gas prices above. When oil prices come down so to royalty payments, production taxes, operating expenses and all oilfield services. It is VERY IMPORTANT to consider each company's production mix (oil, gas and NGLs) and their hedging programs.

Rising demand will “put a floor beneath crude prices in 2015 and beyond, limiting further price drops and pointing to a gradual correction,” Moody’s said. But further price weakening would result from continuation of the decline in China’s growth, a lifting of sanctions enabling Iranian production to rebound, and a lack of production discipline among members of the Organization of Petroleum Exporting Countries.

“In the longer term, global oil demand will rise as economic growth gradually improves in Europe, China, and other markets, implying a moderate rebound for the low oil prices that we see persisting into 2015,” Moody’s said.

Drew Venker, CFA – Morgan Stanley
November 25, 2014 2:19 PM GMT
We are lowering capex and production estimates consistent with cutting our WTI oil price assumptions to $75 in 2015, $85 for 2016+. The most impacted are oily Mid-Cap E&Ps with higher leverage. We prefer E&Ps with lower leverage and balanced commodity mix.
Lowering 2015/2016+ oil price deck to $75/$85 WTI. We are marking our 2015 oil price assumption to the strip (WTI: $75) and lowering our long-term (2016+) assumption to $85 WTI (from $90).
We have lowered our 2015 growth and capex assumptions to be consistent with WTI of $75-80 (in line with the strip), which is the anchor for most E&Ps budgets.
Meaningful impacts to longer-term growth if oil prices remain low. If oil prices remain low for a sustained period (12-18 months) there will be notable impacts to growth for 2015, but more meaningful for 2016. Depending on portfolio quality and leverage, the reduction in 2015 activity (from prior trajectory) ranges from moderate to dramatic. Highly levered oily E&Ps are the most impacted while gassy producers with lower debt are less impacted.
The stocks best suited for the current environment are those with lower leverage and either flexibility with capital allocation or a balanced commodity mix, or both. Stocks included in this group are: XEC, CLR, and CXO. These all have below average leverage and significant flexibility to focus capital on areas that deliver the highest rates of return (XEC also has balanced exposure to oil, NGLs, and gas).

Short-term: All eyes on OPEC

Long-term: The fundamentals call for higher oil prices
http://www.oilandgas360.com/oil-prices- ... ls-coming/

I think the world oil annual decline rate is what, about 5 Mb/d? So each year we need to find a "North Dakota + Texas" just to keep production flat...can't see the price being down for long!

I had a nice discussion with a very sharp guy from IPAA a few weeks ago. We agreed that the "U.S. Shale Revolution" will peak this decade. At some point (not that far away) there will be so many wells on steep decline, it will be impossible to drill enough new wells to offset the decline. Also, since we are drilling the Sweet Spots first, the wells in Tier Two acreage won't be as good. What has accelerated the production this year has been the big new completions with a lot more frac stages and a heck of a lot more sand.

We also discussed natural gas prices. His view is that 2015 will be the last bad year for natural gas prices. If we have a warm winter (now doubtful) it could get "ugly" for the gassers next summer. However, when LNG exports ramp up so will gas prices in 2016.

"The cure for low oil prices, is low oil prices". Today's lower fuel prices are a HUGE economic "stimulus package" for the global economy. If the U.S. economy improves (especially job growth), demand for oil will go up. This should also be helping Europe get back on its feet.

Another "silver lining" is that oilfield service costs are coming down. The E&P companies have a lot more leverage now with the drillers.

Worth nothing: Canadian producers, working in the loonie, get a div (or a discount) from the higher US$.

It's a sign of the blindness that goes with binge capitalism that we hear about Saudis and OPEC needing to cut back production, when
it's painfully clear that only a financial knife at the throat will bring cutbacks here, with DVN and others planning double-digit
production gains, as Dan says.

This from oiljack's board:

Oil Bust of 1986 Reminds U.S. Drillers of Price War Risks
By Asjylyn Loder - Nov 25, 2014
The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.

In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.

“1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Wakefield, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world’s output, pumped 31 million barrels a day in October, exceeding its official target of 30 million.

Declining Prices
West Texas Intermediate, the U.S. benchmark contract, fell to a four-year low of $74.09 yesterday on the New York Mercantile Exchange, down 31 percent from the 2014 peak in June. Brent, the pricing standard for more than half of the world’s crude, settled at $78.33 on London-based ICE Futures Europe.

“Someone has to blink,” said Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “OPEC is saying ‘Does it really have to be us?’”

Saudi Arabia wasn’t the first to blink in 1986. The kingdom had been the world’s swing producer for years, boosting output when prices rose and scaling back when they dropped. As fellow OPEC members pumped more crude, the kingdom’s production fell to 3.175 million barrels a day in 1985 from more than 9 million in 1981, according to data compiled by Bloomberg. That left the country facing a growing budget deficit, according to Daniel Yergin’s Pulitzer Prize-winning book The Prize.

Market Share
In December 1985, Saudi Arabia declared its intention to regain market share and oil prices began to decline, sinking to as low as $10.42 a barrel in March 1986 from a November 1985 peak of $31.72.

OPEC reached a new production-sharing agreement in December 1986. By then, the damage to U.S. producers had been done. Unemployment in Oklahoma rose to 8.9 percent and in Texas to 9.3 percent, compared with the 7 percent national average. Production in Oklahoma fell 8.3 percent in 1986 and 7.1 percent in Texas, according to the Energy Information Administration.

“There was just a flood of equipment on the market,” said James Richie, cofounder of Kruse Energy & Equipment LLC in Odessa, Texas. He has been auctioning oilfield gear for 32 years, and said he conducted 86 auctions that year, more than double the typical number. “In 1986, that equipment was bringing pennies on the dollar.”

The history helps explain why U.S. producers are blaming Saudi Arabia and OPEC for falling prices now and that they say are designed to push them out of business.

Shale Battle
“We’re in a battle with Saudi Arabia in regard to market share versus U.S. shale oil,” Scott Sheffield, chairman and chief executive officer of Pioneer Natural Resources Co. (PXD), said on a Nov. 5 earnings call.

“What we’re dealing with here is a renaissance that’s going to be very long-lasting here in the U.S.,” said Harold Hamm, chairman and CEO of Continental (CLR) Resources Inc., in a Nov. 6 earnings call. “And we see OPEC worried about that.”

The Saudis don’t see it that way. Saudi Arabia is committed to seeking a “stable” oil price and speculation of a battle between crude producers “has no basis in reality” Saudi Oil Minister Ali Al-Naimi said at a conference in Acapulco, Mexico, on Nov. 12.

The slump isn’t, regardless of what U.S. producers say, all the fault of Saudi Arabia or OPEC. The group has boosted output by more than 1 million barrels a day since June, led by gains from Libya and Iraq, according to a Bloomberg survey of oil companies, producers and analysts. The Saudis’ contribution was an additional 80,000 barrels. U.S. producers, meanwhile, ramped up output by 621,000 barrels.

Increased Supply
Taken together, the increases are more than enough to supply the 1.1 million barrels a day of worldwide demand growth the Paris-based International Energy Agency has forecast for all of next year.

The glut hasn’t stopped U.S. shale companies from drilling new wells. Top producers including Devon Energy Corp., Continental and Pioneer are planning double-digit production gains next year.

“The U.S. oil industry is blaming the Saudis for a problem that was created here,” Emerson said. “It’s like a gold rush. Everyone is trying to get as much out of the ground as fast as possible.”

Whether this slump proves as calamitous as 1986 depends how long it lasts. Many U.S. producers bought derivatives that protect them against declining prices. That insurance has its limits, and for some companies it will run out after the first half of 2015.

Less Cash
Shrinking revenue will leave less cash to pour into the ground, making some companies vulnerable to a credit crunch. Much of the shale boom is sustained by borrowed money. Total debt for 61 of the U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers reached $199 billion in the third quarter, up from $184 billion a year ago, according to data compiled by Bloomberg.

“There’s no doubt that you’ll see a lot of people who are vulnerable, especially the smaller players who don’t have deep pockets, and are already deep into other people’s pockets,” Lynch said. “Some of them are already hurting.”

There are lots of words in this thread Dan. What's the bottom line?

OPEC will tell us tomorrow where oil prices are heading and Old Man Winter will tell us where natural gas prices are heading.

I sure thought there would be a big reaction to the gas storage report today, but days before holidays often don't tell us much. That was one of the more bullish gas storage reports I have ever seen. It was the largest draw from storage EVER reported in November.

See: http://ir.eia.gov/ngs/ngs.html

BTW: I started working on the updated profile for CRK this afternoon. If we do get the spike in gas prices I expect this winter, CRK will draw a lot of attention. None of their 100,000 mcf per day is hedged.

...the part of that 1986 oil price decline scenario I would love to see repeated.... would be a collapse of Tsar Vladimir Putin's dreams of another Russian empire.
>>>>>>>>>>>>>>>>

The Moscow Times

Putin is Inspired by Russian Empire
by: Georgy Bovt

The decision to erect a monument to 19th-century Emperor Alexander I near the Kremlin, and for President Vladimir Putin to participate in the unveiling ceremony, is an act of historical justice. After all, Moscow's Alexandrovsky Garden is already named after him, and a monument to him used to stand there before the Bolsheviks removed it and had it melted down. By giving special attention to perpetuating the memory of the emperor, Putin not only commemorated the 200th anniversary of Russia's victory over Napoleon but also continued his campaign to position modern Russia as the successor to the Russian Empire.

During the ceremony on Nov. 20, Putin referred to Alexander I as one of the founders of a system of European security. "It was then that conditions for the so-called balance were created, based not only on mutual respect for the interests of different countries, but also on moral values," Putin said. His words clearly referred equally to modern Russia, as it strives to have not only a loud voice in European and global affairs but to also claim a sort of moral leadership as a counterbalance to the "rotten and immoral West."

Following the Napoleonic wars, the victorious powers set out to restore their feudal and absolutist monarchies that had been destroyed by processes triggered by the French Revolution and Napoleon's actions. In those days, Russia probably perceived its contemporaries much as Moscow now views the "color revolutions" in Ukraine and Kyrgyzstan — that is, as popular uprisings after which the authorities had to struggle to restore order. And at its core, today's order is much like the monarchical and feudal system of the past.

The Congress of Vienna was held in that city in 1814-15, with Austrian statesman Klemens Wenzel von Metternich presiding. It brought together representatives of all the European countries except the Ottoman Empire. The Congress of Vienna is comparable to the Yalta and Potsdam conferences that shaped Europe after World War II, and to some to extent the Helsinki Conference in 1970 that regulated the interaction of the various states that, by that time, had aligned into different blocs.

Looking back, it is amazing that those contentious monarchies were able to reach an agreement given the atmosphere of cynicism, intrigue and mutual distrust that existed. Apparently, today's leaders in Moscow would like to see a return to the model of international relations that characterized the Yalta, Potsdam and Vienna gatherings.

The Congress of Vienna completely redrew the map of Europe and included what historians would later refer to as the fourth partitioning of Poland. Part of the Duchy of Warsaw that Napoleon had created took the name of the Congress Kingdom of Poland and became part of the Russian Empire, making Emperor Alexander I also the king of Poland. Austria received the southern part of Poland and a large part of so-called "Red Russia," today's western Ukraine.

This is the origin of the current cultural and political split in Ukraine, a country that grew territorially in part through the Molotov-Ribbentrop Pact of 1939 — toward the pro-Russian southeast and the pro-European Galicia. Western Poland returned to Prussia. Switzerland was the luckiest participant because it was there at the Vienna Congress that its neutrality was proclaimed and guaranteed by Europe. From that point onward, the Swiss economy began to flourish, undisturbed even by the two subsequent bloody European wars that bypassed the country.

The Vienna Congress established not only a new balance of power in Europe and put the four "superpowers" of the time — Russia, Austria, Prussia and Britain — in the leading roles, it also marked the pinnacle of 19th-century Russian diplomacy. Today, Moscow can only dream of simply "carving up" Europe according to its wishes. In fact, Russia retained that level of influence after the death of Alexander I, under Tsar Nicholas I and right up to Russia's defeat in the Crimean War in 1856.

As for perpetuating the legacy of Alexander I, his rule was sharply divided between the period prior to the war with Napoleon and that which followed. During the first period he followed the example of his grandmother, Catherine the Great, by implementing reforms that included restrictions on the institution of serfdom and even went so far as to consider abolishing the practice altogether. The reformer Count Mikhail Speransky was a personal favorite of his.

Alexander I implemented large-scale reforms to the higher levels of government and the education system. He set out to transform all state institutions according to European models and to achieve a rapprochement with Europe. Speransky prepared a comprehensive set of radical bourgeois political reforms that even included the planned establishment of an elected State Duma and, consequently, a constitutional monarchy.

Putin said, "The era of Alexander I was a time of Russia's revival and consolidation. Many state and legal reforms were carried through, the first Russian round-the-world expedition was launched, and five new universities were founded." The same is largely true of Putin's first term in office, when his administration actively introduced a number of reforms to government.

In addition, Alexander I largely reopened Russia's doors to Europe after Catherine the Great had closed them and Emperor Paul I, fearing a revolution, had practically locked them down behind an Iron Curtain. Foreign books began flowing into Russia, whereas censors had previously blocked them all. In fact, the censorship of books was completely abolished, great numbers of Russians began studying abroad, and not a single person was subjected to the death penalty during the reign of Alexander I.

The "Arakcheyevshchina" — reactionary repression made infamous by Russian General and Count Alexei Arakcheyev — became the symbol of the second period of Emperor Alexander's rule. His ardor for reform cooled considerably, although he did make preliminary plans for liberating the serfs. However, it never went any further. When the European revolutions began in 1820 and Russia's own Semenov regiment rebelled — not unlike Russia's mass protests from late 2011 to early 2012 — the emperor responded with an iron fist and forgot all thoughts of reform.

The death of Alexander I was long shrouded by the myth that he had not actually died of typhoid fever in Taganrog, but had grown tired of the hassles of leadership and taken on the guise of an old hermit named Fyodor Kuzmich, dying only in 1864 in Tomsk. If true, he would have probably regretted seeing how, after suppressing the Decembrist uprising in 1825, Russia became highly reactionary under his successor, Tsar Nicholas I, causing the country to lose its former influence in Europe and pushing it into technological backwardness.

That, in turn, resulted in Russia's defeat in the Crimean War and led to the modernizing liberal reforms of Tsar Alexander II. It is very unlikely that the authorities will put up a monument to Emperor Nicholas I in the near future, although they have already erected one to Tsar Alexander II — also not far from the Kremlin.

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