Commodity Price Drivers and Other 2021 Trends: Q1 Oil and Gas Industry Update

Commodity price drivers

For 2021, the 15^th OPEC and non-OPEC Ministerial Meeting approved the adjustment of production levels for May through July. Activity also accelerated a rebalancing of the oil market: since the 10^th Ministerial Meeting last year, cooperating countries contributed to the adjusting downward global oil supply (2.6 billion barrels by the end of February 2021).

On the last day of March, West Texas Intermediate closed at $59.19/barrel on the New York Mercantile Exchange, a 189% increase from last year. Over the same period, Brent increased by % to $63.52/barrel on the London-based ICE Futures Europe exchange.

This year, a steady recovery process from the pandemic has driven a slow rise in rigs through March. As of March 26, the Baker Hughes rig count summary showed the US total active rig count at 416, comprised of 324 oil rigs and 92 gas rigs. Since February, this represents an increase of 15 oil rigs (no changes for gas), but a year-over-year decrease of 310 rigs (300 oil; 10 gas) since March 2020.

United States policy updates

Though plans are in early stages and may be reshaped by policymakers, the Made in America Tax Plan was announced by the Biden administration. It includes plans to eliminate oil and gas company subsidies and raise levies on corporate polluters, amounting to $35 billion over the next decade. The plan also aims to provide new incentives for clean energy, climate change resilience, and carbon storage. The plan may primarily affect projects in the oil and gas industry with lesser impacts to end consumer prices. At present, oil and gas producers benefit from a tax code designed to encourage investment that allows them to deduct drilling costs early and carry forward losses for several years.

Restructuring updates

In the energy sector, the first quarter had seven Chapter 11 bankruptcy cases, including three companies who filed for a second time, according to Debtwire.

Announced in December, Ferrellgas Partners LP commenced voluntary pre-packaged Chapter 11 proceedings on Jan. 11, 2021 in the District of Delaware. The holding company’s debt will be eliminated, more than $1.5 billion of operating company debt will be refinanced, and over $1 billion of new capital will be raised at the operating company level.

Castex Energy, which focuses on exploration and development in the South Louisiana and Gulf of Mexico shelf, filed for Chapter 11 in Texas on Feb. 26, 2021. Despite its previous reorganization in 2017, and a subsequent $65 million asset sale, Castex was unable to service mounting debt obligations (roughly $200 million) due to the prolonged downturn in oil and gas prices.

Oslo-listed offshore drilling contractor Seadrill Limited has filed for bankruptcy protection in a federal court in Texas, its second round of Chapter 11 protection in the last four years. In addition, five of the company’s subsidiaries in Asia filed for bankruptcy protection in the Southern District of Texas. Seadrill aims to continue operations for its fleet through a balance sheet restructuring. The company expects a large debt-for-equity swap and has $650 million in cash on hand to meet workforce and vendor obligations.

Announcing a successful restructuring and emerging from Chapter 11 Feb. 9, 2021; Chesapeake Energy Corp. equitized approximately $7.8 billion of debt and its preferred and common equity interests have been canceled. The company listed new common shares on NASDAQ; trading began February 10 with additional shares expected to be issued.

Nine Point Energy and its subsidiaries voluntarily filed for Chapter 11 protection on March 15, 2021. The company plans to conduct business as usual during the restructuring process, and it obtained debtor-in-possession financing from secured lenders under Nine Point’s credit facility. Nine Point’s predecessor, Triangle Petroleum USA Corp., previously filed for Chapter 11 in 2016.

HighPoint Resources Corp. filed for bankruptcy on March 14, 2021, and its liabilities are estimated to be close to $1 billion. The filing will result in an acquisition by Bonanza Creek Energy Inc. two days after shareholders of both companies approved plans to merge as part of a prepackaged debt restructuring agreement.

Sundance Energy Inc. and its affiliates filed for voluntary Chapter 11 bankruptcy protection on March 9, 2021, entering into a restructuring support agreement with the administrative agent under the company’s prepetition reserve-based credit facility. The restructuring support deal covers a prepackaged reorganization plan that will remove $250 million of funded debt obligations through a debt-for-equity exchange. In addition, Sundance has secured commitments of at least $45 million in debtor-in-possession financing.

M&A, capital markets, and capital projects

Mergers and acquisitions

ConocoPhillips completed its acquisition of Concho Resources on January 15, 2021, boosting its presence in the Permian Basin. The transaction created a $60 billion company with a resource base of approximately 23 billion barrels of oil.

Energy Transfer LP will acquire Enable Midstream Partners, LP in an all-equity transaction valued at approximately $7.2 billion. This acquisition will strengthen Energy Transfer’s natural gas liquids infrastructure by added gas gathering and processing assets in the Anadarko Basin in Oklahoma and integrate with Energy Transfer’s US Gulf Cost NGL transportation and fractionation assets. The acquisition will provide significant assets for gas gathering and processing across Oklahoma and Arkansas and in the Haynesville Shale spanning parts of Texas and Louisiana.

Capital projects and clean energy trends

Aiming to reduce emissions and environmental footprint, the Kingdom of Saudi Arabia proposed two new initiatives, the Saudi Green Initiative and Middle East Green Initiative. The multi-pronged initiatives aim to reduce carbon emissions in the region by 60% via clean hydrocarbon technologies and tree planting, with 10 billion trees in Saudi Arabia and 50 billion total. The kingdom aims to generate half its energy from renewables by 2030.

Chevron Corp. has adjusted its budget for capital projects to $14-$16 billion, lower than the projected investment in 2020 ($19-$22 billion) with plans to invest the majority in upstream projects to grow its presence in the Permian Basin, and global exploration and international upstream programs.

ExxonMobil has announced it will prioritize capital investments on high-value assets this year, with capital and exploration investments of $16 to $19 billion expected. The company seeks to leverage significant cost savings realized last year and plans to continue the expense management and business line reorganizations with a 15% global workforce reduction by the end of 2021.

As its post-bankruptcy restructuring process comes to a conclusion, Chesapeake Energy has announced a capital reinvestment strategy of 60% to 70% of cash flow. It has also committed to achieving net-zero greenhouse gas (GHG) direct emissions by 2035 eliminating routine flaring on all wells completed on a go-forward basis with a meaningful reduction to methane and GHG intensity by 2025.

Xcel Energy announced details of its upcoming Clean Energy Plan that will result in an estimated 85% reduction in carbon dioxide emissions from 2005 levels by 2030. The recently announced plan includes adding approximately 5,500 MW of new wind, solar generation, and battery storage and reducing coal plant operations by 2030 and retiring or repowering all remaining coal units by 2040.