IF HE WERE ABLE to reverse the decision to invest $20 billion in US shale back in 2011 with the company's purchase of Houston-based Petrohawk, retiring BHP Billiton Chairman Jacques Nasser says he would do it in a heartbeat. BHP is primarily a mining company, so this was an unusual investment for the Australian firm that was made near the peak of the petroleum industry's boom cycle when values were high. Back in May, the company's CEO, Andrew Mackenzie, similarly said the deal was "poorly timed."
When it comes to mergers and acquisitions, what is bad for one company is often good for the other. Floyd Wilson probably has no doubt he made the right decision at the right time to sell Petrohawk.
BHP Billiton is not the only company to have regrets about its investment in shale. Activist investors have also questioned the decisions made by management teams for several large North American shale operations. Some are urging divestment, while others are demanding that top executives step down or accept more independent board members to look after investor interests.
The question I would pose is: Is shale still a good investment? There are arguments pro and con.
Writing in this issue of OGFJ, Rystad Energy's Nadia Martin Wiggen notes that while activity levels by North American shale producers have risen since the first of the year, share prices for oil companies have retreated from first-quarter highs. And in the oilfield services sector, she says, "Share prices have collapsed faster than the index of E&P companies like we saw in 2008."
On the positive side, Wiggen says she observed "significant decreases in breakeven oil prices both in shale and offshore," doubtless due to improvements in efficiency and reduced payments to OFS companies between 2Q2014 and 3Q2016. Rig rates also fell substantially during this period.
Fortunately for US and Canadian producers, oil prices began to climb back up after OPEC enacted producers cuts from its member oil exporters and several additional large producers as well. On July 31, WTI broke the $50 threshold for the first time in a long while. This has propelled a modest recovery in the oil market, which in turn is attracting new investors.
Earlier this year, Harold Hamm, CEO of Continental Resources, told Reuters that US shale producers are drilling themselves into a hole and risk flooding the market with excess crude oil. As drilling and production are rising, the companies are "barely breaking even or losing money" and share prices are declining, according to the article. Hamm urged producers to be prudent and use some discipline.
Many industry participants believe that $50 is about the break-even point for company profitability. When the oil price falls below $40, it may be time to rethink strategies and lay down some rigs. Although some producers might be profitable at the wellhead with $40 oil, that doesn't translate into bottom-line net income, which is what investors and shareholders want to see.
Eugen Weinberg, a senior commodity analyst at Commerz-bank AG in Frankfurt, Germany, has written that the OPEC production cuts would prompt US shale producers to drill more and increase US production figures, which would keep crude prices down. His advice to OPEC is to change course and go back to the oil cartel's initial strategy of pumping at the maximum rate and "let prices crash to kill shale" while aiming for steady price increases over the long term.
Gee, and I thought Germany was a US ally.
Nevertheless, there is a point to be made here. If OPEC cuts production in hopes of raising oil prices, it serves no purpose if US shale producers respond by raising production levels to offset those cuts. It simply changes the origin of the crude oil. Lacking any increase in demand, the lower prices won't change substantially.
There are a number of wild cards in the deck that could impact future oil prices, notably Libya, Nigeria, and Venezuela. A July 24 Raymond James research report notes that Libya and Nigeria have both boosted production this summer after four years of recurring violence in those countries that has hampered oil production. However, this increase may be temporary as investors have been reluctant to sink funds into countries that are seen as unstable. RJ's take from this is that current production levels are "flattish at best."
As for Venezuela, the South American nation seems on the verge of an all-out civil war. The US just announced economic sanctions, which may hurt the country's people more than the government, but that's another story. So far, the US has not banned the import of Venezuelan crude, much of which is refined on the Texas Gulf Coast.
RJ thinks these three OPEC "wild cards" will add 550,000 bpd of net supply growth this year, which may be sustainable into the future.
Do we have an answer to our question as to whether or not shale is a good investment? No. These are just some points to consider. Investors will have to answer that question for themselves.
