Insights > Q2 2020 Oil and Gas Industry Update: What You Need to Know

Q2 2020 Oil and Gas Industry Update: What You Need to Know

The market is still reeling from the effects of the coronavirus. Total oil demand in 2020 is expected to average 92.1 million barrels per day (mb/d), down by 7.9 mb/d compared to 2019, before recovering by 5.3mb/d  in 2021. The International Energy Agency (IEA) expects that it will take two or more years for oil demand to fully recover, principally due to a decrease in demand for transportation fuels. In the July 2020 Short-Term Energy Outlook (STEO), the US Energy Information Administration (EIA) forecasts that “US consumption of petroleum and other liquid fuels will average 18.9 million barrels per day in the second half of 2020, up from an average of 17.7 million barrels per day in the first half of 2020.” There is optimism that output cuts by Organization of the Petroleum Exporting Countries (OPEC) and its allies will help ease the oversupply of crude in the market and stabilize commodity prices. As global demand for oil recovers in the coming months, the EIA expects global oil inventories to decline through the end of 2021, which will help eliminate the surplus accrued throughout the year.

 

48%

Crude WTI Q2 2020 vs Q1 2020:
48 % increase from $20.48 to $39.27

7%

Natural Gas Q2 2020 vs Q1 2020:
7% increase from $1.64 to $1.751

Commodity price drivers

Oil prices experienced downward pressure in the second quarter of the year, as prices fell to unprecedented levels. In late April, West Texas Intermediate (WTI) futures plunged into negative territory. Demand for oil plummeted as facilities for storing crude were at or near full capacity. COVID-19, the aversion to owning crude with few storage options, and the price war between Russia and Saudi Arabia all contributed to the commodity price collapse. In April, OPEC and its allies agreed to begin to cut output in May to offset the demand drop and price decrease caused by the pandemic.

Since OPEC and its allies had agreed earlier in the year to cut production, certain members such as Nigeria, Angola, and Iraq failed to meet the production quota as compliance was not at 100%. The intervention of OPEC and its allies still helped the Brent crude benchmark almost double from its low of $20 per barrel in April to $41.15 as of June 30. OPEC and allies delivered 89% of its pledge to cut 9.7 million barrels a day from production in June.

It is expected that stockpiles will begin to diminish over the next few months as oil producing nations reduce their output. This could change if crude prices rebound, jumpstarting the American shale industry, and incentivizing an increase in OPEC production towards the latter part of 2020.

West Texas Intermediate closed at $39.27 a barrel on the New York Mercantile Exchange on June 30, a 46% decrease from last year. Brent decreased by 38% to $41.15 a barrel on the London-based ICE Futures Europe exchange over the same period.

The Baker Hughes rig count summary as of June 26 shows the United States as having a total active rig count of 263, which is comprised of 188 oil rigs and 75 gas rigs. This represents a decrease of 34 oil rigs and a decrease of two gas rigs from May, and a year-over-year decrease of 703 rigs (605 oil rigs; 98 gas rigs) from June 2019. The steep drop in rigs from April to June is again due to the pandemic as well as oversupply concerns.

Industry updates                          

S&P Global Platts, a provider of information for the commodities and energy market announced a new benchmark for US crude oil, Platts American GulfCoast Select (AGS). This new benchmark will reflect the value of waterborne light, sweet crude that loads FOB US Gulf Coast.

The Railroad Commission of Texas issued a total of 312 original drilling permits in June compared to 1,001 in June of last year. The breakdown of well types consists of 72 for oil, 24 for gas, 187 for oil or gas, 24 for injection and five for other permits.

As companies face the effects of the coronavirus crisis on the oil and gas industry, behemoths like BP, Shell, and Occidental Petroleum announced that in their Q2 financial statements there will be billion-dollar impairment charges on their assets. The industry also experienced many layoffs and furloughs as employers tried to trim down expenses to cope with the downturn in the demand for crude. BP CEO, Bernard Looney stated that his company will let go of 14% of its workforce. It is estimated that tens of thousands of jobs have been lost across the US oil patch.

188

Oil Rig Count:
188 (Q2) vs. 624 (Q1)

75

Gas Rig Count:
75 (Q2) vs. 102 (Q1)

263

Total Rig Count:
263 (Q2) vs. 726 (Q1)

Restructuring updates

The drastic reduction in oil prices has caused a decline in the number of drilling rigs, as companies face financial hardships. As oil prices hover in the $30 to $40 range, it is expected that a good number of players will seek protection from lenders. According to Debtwire’s Data on Transactions report, there were over 20 Chapter 11 bankruptcy cases in the oil and gas and energy conglomerate sector in the second quarter alone, with at least five bankruptcies occurring in June.

Vista Proppants and Logistics LLC and its subsidiaries filed for Chapter 11 bankruptcy protection on June 9. It also secured an $11 million debtor-in-possession credit facility from its senior lenders to cover operational costs during restructuring. Vista is a provider of frac sand solutions for oil and gas well completions.

Extraction Oil & Gas, a Denver-based exploration and production company, filed for Chapter 11 bankruptcy protection on June 14. At filing, it had about $1.8 billion in debt that it hopes to eliminate by giving note holders 97% of the new common stock as part of its restructuring. Extraction was able to obtain $125 million of debtor-in-possession financing from its existing lenders.

Chisholm Oil & Gas, owned by Ares Management Corporation and Apollo Global Management, filed for Chapter 11 bankruptcy protection on June 17. In its filing, it listed liabilities between $500 million and $1 billion and assets ranging from $1 billion to $10 billion.

Sable Permian Resources filed for Chapter 11 bankruptcy protection on June 25, 2020. The company has secured $150 million in debtor-in-possession financing to fund its operations. According to its filing, Sable Permian Resources has $575 million in revolving debt and $744 million in other long-term debt.

Lilis Energy Inc., an exploration and production company operating in the Permian Basin, filed for Chapter 11 bankruptcy protection on June 28. Lilis Energy has received a commitment from its bank lenders to provide it with up to $15 million in debtor-in-possession financing.

Chesapeake Energy, the shale gas drilling pioneer, filed for Chapter 11 bankruptcy protection. Chesapeake entered Chapter 11 due to an unmanageable $9 billion in debt and with bond payments of $192 million due in August. As part of its reorganization plan with lenders, Chesapeake obtained $925 million in financing under a revolving credit facility and eliminated almost $7 billion of debt. Another $600 million in future commitments was also obtained.

Covia Holdings Corp., filed for Chapter 11 bankruptcy protection on June 29, 2020. Covia Holdings is a supplier of sand and mineral products for the oil and gas industry. There is a restructuring agreement in place with holders of a majority of Covia Holding’s secured debt. Covia Holdings hopes to cut more than $1 billion in debt and jettison its railcar leases.

M&A, capital markets, and capital projects

Capital markets

In Q2, Occidental Petroleum generated about $3 billion of orders for its high-yield bond sale. Occidental plans to use the proceeds from the bond sale to buy back as much as $1.5 billion of bonds maturing in 2021 and 2022.

Capital projects

The COVID-19 pandemic has resulted in the largest drop in global energy investment in history. According to the International Energy Agency, global investment in oil and gas in 2020 is expected to decline by almost 33% and investment in shale is anticipated to drop by 50%. Three of China’s oil majors—CNOOC, PetroChina, and Sinopec—are cutting down their capex to $19 billion for 2020, including for international projects. Baker Hughes announced that it plans to slash its 2020 net capital spending by more than 20%.

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