Renewable Energy, Restructurings, and Other 2021 Trends: Q2 Oil and Gas Industry Update
As global markets continue the long road to recovery resulting from the ongoing COVID-19 pandemic, world-wide vaccination campaigns and gradual reopening of businesses hint at progress towards the long-awaited return to normalcy. In June, preliminary data from the International Energy Agency (IEA) suggested that global oil demand will return to pre-pandemic levels by the end of 2022, bolstering a forecasted increase of 5.4 million barrels per day (mb/d) in the current year.
Members of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are well positioned to meet this rise in demand. The organization boosted oil production by nearly 2 mb/d from May to July and is expected to have an additional 6.9 mb/d in available production capacity going forward. Responding to rising demand, US West Texas Intermediate crude has experienced notable growth in excess of 50% for the current year, and August futures settled at their highest marks since October 2018.
Q2 2020 vs. Q2 2021:
87.1% increase from $39.27 to $73.47
Q2 2020 vs. Q2 2021:
82.6% increase from $41.15 to $75.13
Q2 2020 vs. Q2 2021:
115.3% increase from $1.76 to $3.79
Commodity price drivers
In June, a OPEC and non-OPEC meeting reinforced conformity to production adjustments proposed earlier in the year, with participating countries conforming to desired output volumes at a rate of 114%. The members of OPEC+ remain optimistic and reemphasized the need to closely monitor production adjustments and market conditions in order to return to pre-pandemic production levels.
Oil prices showed another monthly gain, with West Texas Intermediate (WTI) crude closing June at $73.47 per barrel (/bbl) on the New York Mercantile Exchange; an increase of $14.28/bbl or 24% from Q1, and a year-over-year increase of nearly 87% from 2020. Similarly, Brent crude finished the month of June at $75.13/bbl, up $11.61/bbl or 18% from its March close, and up almost 83% from June 2020.
On June 8, the US Energy Information Administration (EIA) updated its short-term energy outlook (STEO), highlighting the continued uncertainty of the ongoing global pandemic. Despite those concerns, the administration remains bullish, forecasting Brent crude prices to average approximately $68/bbl in the third quarter. Then, projections ebb to an average of $60/bbl for 2022 among concerns over continued production growth from OPEC and its partners. The June STEO also adjusted projections for summertime US gasoline consumption, forecasted at an average 9.1 mb/d, up from summer 2020 approximately 1.3 mb/d.
For eleven months in a row, US energy players added to the rig count as drillers return to the wellpad amidst oil prices climbing to their highest mark since 2018. The Baker Hughes rig count summary as of June 25, 2021 shows a total active US rig count of 470, comprised of 372 oil rigs and 98 gas rigs. This represents an increase of 13 oil rigs from May 2021 (with the gas rigs remaining constant), and a year-over-year increase of 207 rigs (187 oil rigs; 20 gas rigs) compared to June 2020.
On May 28, the US Department of the Treasury released details surrounding the Biden administration’s 2022 revenue proposals, including numerous benefits favoring a shift to renewable energy sources, as well as sanctions on existing fossil fuel practices. The proposals would call for the repeal of a number of fossil fuel incentives including benefits surrounding drilling costs and credits for eligible oil recovery projects. The Biden administration seems determined to leave its mark on policies related to renewable energy and climate change.
The Railroad Commission of Texas issued a total of 739 original drilling permits in June 2021, up 427 permits compared to June 2020. For original drilling permits in June 2021, well types included 171 oil, 37 gas, 501 oil or gas, 24 injection, two service, and one other type. As of June 2021, processed well completions for the year totaled 4,383, down approximately 45% from completions in the prior year’s same period.
As the energy sector seeks sustained growth for the rest of 2021, industry leaders remain focused on maximizing stakeholder value, while closely monitoring market conditions and ever-changing production adjustments from OPEC and its partners.
According to Debtwire’s Data on Transactions report, the energy sector saw four Chapter 11 bankruptcy cases and one Chapter 15 bankruptcy case in the second quarter of 2021, a positive trend in the sector when compared to the seven cases filed in the previous quarter.
Oil and gas asset manager Dorchester Resources, L.P. filed for Chapter 11 bankruptcy on April 5. In its filing, Dorchester Resources reported assets and liabilities in the range of $10 million to $50 million.
Energy conglomerate DTEK Finance PLC filed for Chapter 15 bankruptcy protection on April 16. DTEK Finance’s total liabilities amounted to approximately $2.1 billion.
WB Supply LLC, a leading pipe and supply company in the U.S. for over 40 years, filed a petition for relief under Chapter 11 on April 20. The petition comes after the bankruptcy of one of WB Supply’s largest customers in 2019, coupled with the overall struggles in the pipe and supply industry in recent years. In its bankruptcy filing, WB Supply reported assets and liabilities within the range of $10 million to $50 million.
Houston-based OFS International LLC (OFSi) filed for Chapter 11 bankruptcy protection on May 31. The oilfield services company reported assets in the range of $10 million to $50 million, and liabilities in the range of $50 million to $100 million.
Diesel fuel supplier Hellenic Petroleum LLC filed for voluntary Chapter 11 bankruptcy protection on June 7, reporting total assets in the range of $10 million to $50 million and total liabilities in the range of $10 million to $50 million. The debtor is subject to an involuntary Chapter 7 petition filed on March 10 in the same court.
M&A, capital markets, and capital projects
As global demand stabilizes and oil prices reach their highest mark in nearly three years, US capital markets have reopened at an historic pace. According to data published by S&P Global Market Intelligence, Wall Street investors have financed approximately $34 billion in new bonds issued by speculative-grade energy companies in 2021, driven by low borrowing costs and high commodity prices. The influx of cash comes as investors look for US oil companies to shore up balance sheets and satisfy stakeholders in the wake of the ongoing pandemic.
Oil Rig Count
June 2020 vs. June 2021:
185 vs. 372
Gas Rig Count
June 2020 vs. June 2021:
78 vs. 98
Total Rig Count
June 2020 vs. June 2021:
263 vs. 470
Overall 79% increase
Mergers and acquisitions
In conjunction with the spike in capital markets activity, the energy sector has seen a new wave of consolidation efforts during the quarter focused on minimizing risk and maximizing stakeholder value.
On May 4, Dallas-based Pioneer Natural Resources (PXD) finalized an agreement to acquire DoublePoint Energy for an aggregate purchase price of approximately $6.2 billion. The deal comes as PXD seeks to supplement its asset base and grow its undrilled acreage position in the Midland Basin. Pioneer Natural Resources will issue approximately 27.2 million shares of common stock to DoublePoint Energy shareholders along with $1 billion in cash and will assume approximately $900 million in debt and other liabilities.
US shale drillers Cabot Oil & Gas Corp and Cimarex Energy Co. announced an all-stock merger of equals on May 24, with the two companies combining for a $17 billion enterprise value. The merger attempts to protect the two companies against volatility in commodity pricing and market demand.
On June 2, Houston-based gas producer Southwestern Energy announced a definitive merger agreement with Haynesville producer Indigo Natural Resources, LLC, a deal valued at approximately $2.7 billion, expected to close in the fourth quarter of 2021. The merger might compliment Southwestern Energy’s existing portfolio of high-return dry gas inventories.
Capital projects and clean energy
As stakeholders continue to favor renewable energy, industry leaders are taking notice. ExxonMobil announced plans to invest nearly $3 billion into carbon capture initiatives, and Occidental Petroleum stated that carbon capture will be at the forefront of its plans to reach net-zero emissions by the year 2050.
Siemens Energy AG launched its industrial scale green hydrogen facility in Dubai on May 20, marking the first facility of its kind in the Middle East and North Africa. The pilot project, a collaborative effort with the Dubai Electricity and Water Authority and Expo 2020 Dubai, is projected to have production capacity of approximately 5,000 megawatts by 2030.
On April 11, in conjunction with leaders in Uganda and Tanzania, France’s Total and China’s CNOOC signed agreements that will jump-start the construction of a $3.5 billion crude pipeline stretching from Ugandan oilfields to the Indian Ocean. The East African Crude Oil Pipeline (EACOP) is positioned to provide crucial transportation to the otherwise landlocked Ugandan crude reserves located in the Albertine Rift Basin.