Q4 2020 Oil and Gas Industry Update: What You Need to Know
Pandemic-related disruptions impacted the energy markets during 2020 in unprecedented ways. Two key factors: demand deterioration and an oversupply glut forced US oil futures to turn negative for the first time in history, forced a rig count to record lows, and ExxonMobil was dropped from major US companies on the S&P Dow Jones Indices. On Jan. 12, the International Energy Agency (IEA) released preliminary data that indicated global liquid fuels consumption declined by 9 million barrels per day in 2020, the largest annual decline in IEA data since 1980.
WTI: 20.6% increase from $40.22 in Q3 to $48.52 in Q4
Brent Crude: 26.5% increase from $40.95 in Q3 to $51.80 in Q4
Natural Gas: 0.5% increase from $2.53 in Q3 to $2.54 in Q4
Despite this historic year, energy markets rebounded as Brent crude surpassed $50 per barrel at year-end. However, the pace of demand recovery remains highly uncertain going into 2021. A recent Reuters poll suggests oil prices are unlikely to recover much more in 2021 due to a new coronavirus variant overshadowing the initial vaccine-related optimism that boosted demand outlook in late 2020.
Commodity price drivers
December oil prices traded at highest levels in over nine months. West Texas Intermediate (WTI) finished the year at $48.52 per barrel, an increase of 21% from its third quarter close at $40.22. Similarly, Brent crude increased 26.5% from its previous quarter, closing December at $51.80 per barrel. Despite the recent upward trend, WTI and Brent are down 21% and 22%, respectively, from the same time last year.
The long-awaited roll out of vaccination programs, progress toward a US fiscal stimulus deal, and strong demand in Asia have helped buoy commodity prices over the past several weeks; however, industry outlook remains uncertain as the pandemic lingers. In its December Oil Market Report, the IEA noted “The understandable euphoria around the start of vaccination programs partly explains higher prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand.” Rystad Energy analyst Louise Dickson also noted “the new strain of the coronavirus in the UK has shown us that the vaccine optimism holding Brent crude above $50 per barrel could be deflated in a fleeting moment” further evidencing the fragility of the current commodity price environment.
Though the pandemic continues to threaten the demand outlook, market sentiment strengthened on the supply side, helped by recent news from the Organization of the Petroleum Exporting Countries and allies (OPEC+) to hold output steady in February. More notably, Saudi Arabia announced voluntary production cuts of one million barrels per day through March to offset production increases from Russia and Kazakhstan.
Per the December 2020 Short-Term Energy Outlook (STEO), the US Energy Information Administration (EIA) expects Brent crude prices will average $49 per barrel in 2021, up from an expected average of $43 per barrel in the fourth quarter of 2020, and global consumption of petroleum and liquid fuels will average 97.4 million bpd in 2021, a modest increase from the 2020 forecasted average of 94.2 million bpd.
The Baker Hughes rig count summary as of December 31 shows the US total active rig count at 350, including 267 oil rigs and 83 gas rigs. This represents a month-over-month increase of 32 rigs (26 oil and six gas) from November, and a year-over-year decrease of 443 rigs (decrease of 403 oil and 40 gas) since December 2019. In 2020, the US oil and gas rig count increase from November to December primarily stems from a brief rebound in crude prices that prompted some US producers to return to the well pad.
The Railroad Commission of Texas issued 486 original drilling permits in December 2020 compared to 803 in December 2019. Well types for original drilling permits in December 2020 include 118 oil, 43 gas, 296 oil or gas, 12 injection, and 17 other permits. Well completions processed year to date for 2020 for new drills, re-entries and re-completions total 14,140 versus 9,238 recorded during the same period in 2019.
To solidify its place as a leading global data provider, S&P Global Inc.—parent company to the leading independent provider of energy and commodities information, S&P Global Platts—has announced plans to merge with IHS Markit Ltd. The merger marks an all-stock deal valued at $44.5 billion, projected to be the world’s second-largest acquisition of 2020 according to Bloomberg.
At a time when investors are looking to obtain as much information as possible about markets and companies, some believe the deal could trigger a wave of M&A activity among big data providers in the oil and gas and finance industries.
Though price cycles typically ebb and flow in the oil and gas sector, the current downturn seems unlike previous scenarios. Major oil companies, such as BP PLC and Total SE are forecasting a longer-term decline in petroleum demand, indicating the peak may have already occurred. And with the Biden administration positioning clean energy as a priority initiative, oil and gas companies are realizing the new energy future might come sooner than expected. Facing difficult decisions anticipated in the coming months, the trends each company chooses to prioritize could impact likelihood of survival or success in the years ahead.
During December, four Chapter 11 bankruptcy cases were filed within the energy sector, resulting in 12 reported filings during the fourth quarter. These numbers indicate a positive trend when compared with the over 45 filings reported in the previous two quarters.
Seadrill Partners LLC, a London-based offshore drilling contractor, filed for bankruptcy on Dec. 1, 2020 after failing to make periodic swap payments to lenders. The company plans to restructure over $3 billion in debt and leverage the bankruptcy process to ensure that all customer, vendor and employee obligations are met without interruption.
Oil: 670 in Dec 2019 vs. 267 in Dec 2020
Gas: 123 in Dec 2019 vs. 83 in Dec 2020
Total Rigs: 793 in Dec 2019 vs. 350 in Dec 2020 (56% decrease)
Evansville-based coal company, White Stallion Energy LLC, filed for Chapter 11 bankruptcy on Dec. 2, 2020 and has terminated all employees. Contributing factors for the filing likely included the company’s inability to secure additional capital, and pandemic-related constraints. Key lenders are currently battling over rights to the coal producer’s property, and its ability to survive remains unclear.
Utah-based coal mine operator, Lighthouse Resources Inc., along with substantially all its subsidiaries, filed for Chapter 11 bankruptcy on Dec. 3, 2020. The company reports $100 million to $500 million in both assets and liabilities and plans to use cash on hand to support the business during the court-supervised process.
Houston-based Superior Energy Services Co. filed for Chapter 11 bankruptcy on Dec. 7, 2020 after initially announcing its restructuring initiative in September. Roughly 85% of holders of the company’s $1.3 billion of senior unsecured notes supported the plan, under which the same noteholders will receive 100% of the equity of the reorganized company. Superior believes its plan will improve operational flexibility and long-term financial health, even in a low-commodity-price environment.
2020 proved a disastrous year for the energy industry and—although bankruptcy filings have appeared to slow during the fourth quarter—some analysts believe the slower filing pace is a respite less indicative of future trends. As companies remain burdened with heavy debt loads and lenders show little appetite to provide outside funding, the number of Chapter 11 bankruptcy filings could continue to surge in 2021.
M&A, capital markets, and capital projects
While the timing of recovery for oil prices and demand remains uncertain, investors are seeking scale to cut costs and control supply, resulting in a recent wave of consolidation efforts in the distressed shale industry.
During the quarter, Pioneer Natural Resources Co. agreed to buy Parsley Energy Inc. for $4.5 billion, ConocoPhillips announced a $9.7 billion takeover of Concho Resources Inc., Devon Energy Corp. acquired WPX Energy Inc. in a $2.56 billion all-stock deal, Southwestern Energy Co. acquired Montage Resources for $193 million and EQT Corp. sent a takeover proposal to rival CNX Resources Corp.
More recently, Canadian oil producer Whitecap Resources Inc. announced on December 8, 2020 that it has agreed to buy rival TORC Oil & Gas Ltd. in an all-stock deal valued at approximately $431 million. Earthstone Energy, Inc. announced on December 16, 2020, that it has entered into a definitive agreement to acquire Independence Resources Management, LLC, for an aggregate purchase price of approximately $186 million. On December 16, 2020, Diamondback Energy, Inc. announced it will acquire QEP in an all-stock transaction valued at approximately $2.2 billion.
On Dec. 11, 2020, Norwegian oil company Equinor agreed to buy a 49% interest in Russian onshore petroleum assets from Rosneft for $550 million.
On Dec. 16, 2020, BP announced it has acquired a majority stake in the largest U.S. carbon offset developer, Finite Carbon, as part of its climate goals and to develop a new revenue stream.