Sand River's Take | Russell T. Rudy Energy LLC
Sand River Financial Advisers issue a “Monthly Commentary” in which they share their perspective on the international and domestic oil markets. In the most recent issue they attribute the recent run-up in oil prices to the prospect of an agreement among major producing countries to limit output. Bulls see Saudi Arabia and other prominent OPEC members as motivated to finally protect prices to prevent domestic unrest. The bears see Russia, as well as OPEC members Iran, Libya and Nigeria, as lacking the will or discipline to abide by quotas. Nonetheless, all parties have agreed in principle to reduce output by approximately 700,000 barrels of oil per day (bopd) which would be significant. However, details still have to be worked out and OPEC is not meeting again until late November. Personally, I remain skeptical. As the saying goes, “There’s many a slip twixt the cup and the lip”.
Domestically, the rig count increased by 32% during the third quarter and has given temporary relief to a number of service companies. Contrary to what many believe, oil production has not dropped as dramatically as anticipated. While prices are at less than half what they were at the peak, we are still producing 8.7 million bopd. That is less than a 10% drop in output vs. an over 50% drop in prices.
With drilling recovering somewhat, operators, especially in the Permian Basin of West Texas and Southeast New Mexico, are tending to defer completion until prices improve further. This is adding to the inventory of drilled but uncompleted (DUC) wells, or fraclog. This represents a significant source of incremental production when prices recover. The downside is that this influx of oil into the market could cause downward pressure on prices.
The Permian Basin dominates merger and acquisition (M&A) activity. The basin accounts for about 2/3 of domestic oil and gas M&A activity and 1/3 of global transactions.
Banks seem focused on working out solutions for troubled loans, and are in the process of re-determining borrowing bases for energy companies. This will probably make them risk averse and very selective in evaluating new energy loans. However, a survey conducted by law firm, Haynes and Boone, found that 57% percent respondents expect private debt, and private equity, to be the primary source of funding for energy deals over the next year. Private equity firms, hedge funds and family offices, all seem willing to invest in oil and gas projects that offer well-developed business plans, a strong team and access to capable advisers and expertise. This appears to be especially true in the case of the Permian Basin.
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Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
