Q3 2019 Oil and Gas Industry Update: What You Need to Know
The United States continues to lead global oil production and is projected to do so over the coming years. Despite significant supply chain disruptions in the Middle East, WTI prices continued to linger in the $50 range during the third quarter. After a good start to 2019, natural gas prices continued to decline, staying in the $2 range in the third quarter. Oversupply in the oil and gas markets, coupled with growing negative global economic sentiment continues to prevent oil and gas prices from reaching new highs.
Global developments—such as the ongoing US-China trade war, Middle East tensions spilling into supply chain disruptions, and declining global growth—continue to shape the oil and gas industry. Here are three key factors that affected the industry over the past few months and what companies can expect as they move into Q4.
Q3 2019 Metrics
63.89 - $50.50 WTI Range
as compared to 2018 at $70.09 – $61.07
$2.68 - $2.07 Natural Gas Range
as compared to 2018 at $3.01 – $2.75
2019 vs. 2018 Rig Count
Oil: 713 vs. 863 | Gas: 147 vs. 190 | Total: 860 vs 1,054
Crude Shock
Oil prices surged nearly 20 percent in the wake of a September 14 attack on two key state oil installations in Saudi Arabia. These facilities collectively produce 5.7 million barrels per day, roughly half of the country’s normal daily output, and 5 percent of the global oil supply. Due to the current glut in the global supply market and the anticipated production recovery at those sites, oil prices settled to preattack levels within the following month. According to the US Energy Information Administration (EIA), the increased risk of supply disruption will affect the price of oil, but it is unlikely to overpower decreased demand, which is driven by a negative global growth outlook.
M&A Activity
During a time when access to external capital is increasingly limited, many oil and gas companies are turning to creative deal structures—including stock-for-stock mergers, consolidations, and joint ventures—as a method to increase free cash flow and lift their stock price. Among the larger deals in Q3 were Callon Petroleum’s purchase of Carrizo Oil & Gas for $3.2 billion in an all equity/debt transaction and PDC Energy’s acquisition of SRC Energy for $1.7 billion in a zero premium stock and debt transaction. In both cases, these companies identified deals that enabled the alignment of asset synergies and long-term growth.
Reorganization Efforts
Oil and gas companies that struggle to reduce costs amid declining energy prices can expect an increased risk of reorganization. Several Chapter 11 filings occurred in Q3, including Alta Mesa, Halcon, and Sanchez. According to Haynes & Boone, there has been an uptick in the number of bankruptcy filings this year with 33 filings as of September 30 and 27 filings since the beginning of May. It is expected that public companies will continue to maintain stringent capital discipline in the near term to maximize free cash flow and manage debt levels. However, many companies still face significant liquidity challenges.
Riveron brings energy companies an uncommon agility, applying extensive technical accounting, finance, and operations expertise to accelerate the timeline and impact of change. Our experienced team members have sat on all sides of the table from executive roles in accounting and operations to investor roles in private equity and investment banks. We understand the unique challenges facing the energy industry and partner with our clients to achieve exceptional results.
