Coronavirus Warning
United Airlines pulled 2020 guidance as a result of the “outbreak.” Microsoft said it would miss segment revenues. The U.S. government has issued travel warnings. Almost everyone has grabbed the best excuse ever to lower their forecasts. Almost…
You may have noticed but oil is down from $62 -$48 since January 2nd. So… can somebody walk me through why, of the 50 or so quarterly reports I’ve read, not ONE COMPANY has mentioned coronavirus ANYWHERE in their Q4 release or 2020 guidance. Nothing! The best excuse for “the dog ate my homework” ever and crickets from my OG homies.
There were a lot of Q4 earnings to read yesterday and I will save most for the podcast this weekend, but here’s the perfect example: Continental. “The 2020 capital budget is projected to generate $2.9 to $3.0 billion of cash flow from operations and $350 to $400 million of free cash flow for full-year 2020 at $55 per barrel WTI and $2.50 per Mcf Henry Hub. A $5 change per barrel WTI is estimated to impact annual cash flow by approximately $300 million. The Company is targeting 4% to 6% annual production growth year-over-year, which is expected to average an approximately 10% CAGR for 2019 and 2020. The Company believes the projected growth range is appropriate given prevailing market conditions and outperformance in 2019.“
I get that it’s Harold’s money… but… WTF. There are no continuous drilling clauses in North Dakota. And P.S. Oil is not $55. Strip for the year is not $55. So their 2020 plan generates 0 free cash flow, FYI.
The reality is the world changes every day and right now, the world supply-demand is posing a real question: Does the planet need more oil in H1. Why are we the only industry that isn’t reacting? Asked a different way: Is it a surprise we are the worst performing sector in the S&P over any time period you pick? No.
I learned a long time ago I don’t have what it takes to run either Exxon and Chevron. But to those that did… what the F&@K are you doing? You issued a 5 year Permian growth plan and don’t revisit it? Are you really being paid for growth? I think you should think very hard about that question in light of current commodity prices.
Historically, the response to this is “our investors expect us to deliver results and reward us for those results.” I present exhibits A and B.
We are a commodity business who trades in lockstep with the price of the commodity. Supply is too high, so prices are down. Growing production right now is TONE DEAF. Thinking your portfolio functions at $50/bbl is downright incorrect.
So, Since everyone else seems to be too afraid To acknowledge the truth about your valuation and balance sheet problem that is exacerbated by price, here’s a press release for every E&P in North America, and I give you permission to copy the wording.
“Due to the events in China and global demand uncertainty for crude and given that natural gas is, in parts of the country, trading at 0 (or less), we are taking a pause. We are modifying our H1 plans to shut down all non essential activity (and by that I mean contracts) and give our employees 3 months off, fully paid. We expect them to donate time to the community and get involved in the 2020 election, as well as have bbqs with their neighbors to explain why “if you are anti frac, you are anti America.” We can’t wait to see them back in June.”
The only thing I’m sure of about coronavirus is it is killing North American E&Ps because we refuse to take the antidote. Stop growing.
Bravo
When Ahmed Zaki Yamani (minister of petroleum 62-86 Opec 25 yrs) was still in charge he was flooding the market with oil in order to bankrupt the US and Russian fracking. He was on path until two things occurred, Donald Trump became President and Mohammed bin Salman was made crown prince and removed him. One visit from Trump and a reminder of their defense agreement oil flow was cut and we rose $15.
Further cuts were proposed because the Saudi welfare state needs oil between 80-$100 and the looming election had the Saudi’s refrain from further cuts.
Saudi debt per person has grown 900% since 2014 and with 97% unemployment is unsustainable.
What is the bet that there are significant production cuts in Saudi following the election, combined with Permian peak oil IMHO we should see oil price rise significantly in 2021
Concur with almost all of it. In 2014, the Permian was producing 1.5 mmbo/d. Horizontals were relatively rare, costs were high and the Eagleford and Bakken dominated the news. Instead, think about the Crimean invasion, sanctions on Russia by the US and telling OPEC who had let oil rise for years, to open the taps and hurt the worlds number 2 producer. That’s why the Russians interfered with the elections, that’s why Trump got elected and without fear of the Clinton’s as president, they cut production 3 weeks later. But yes, production will get cut next week by OPEC+ Next week after today and the US will shut down.
But D.R. Dub, it seems like a no-win situation. Cutting production growth means cutting EBITDA (debt ratio goes up), which means greater leverage, inability to increase dividends, covenant issues, etc. I’m not saying its right (everyone thinks we need to cut production) but easier said than done eh? What do you think is motivating CEOs/companies to continue down this path? They have to drill, right?… I don’t think all CEOs are stupid…but it sure seems like mutually assured destruction (to use a Cold War analogy). Nobody blinks, everyone knows what the right things is, but everyone has to lose.