Shilling : “Oil is headed for $10 to $20 a barrel.”

If crude’s slump back to a six-year low looks bad, it’s even worse when you reflect that summer is supposed to be peak season for oil.

U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986.

It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi.

WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc.

“Summer is when refineries are all running hard, so actual demand for crude is as good as it gets,” Seth Kleinman, London-based head of energy strategy at Citigroup Inc., said by e-mail.

OPEC’s biggest members are pumping near record levels to defend their market share and U.S. production is withstanding the collapse in prices and drilling. The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance,” Kleinman said.

Oil demand usually climbs in the summer as U.S. vacation driving boosts purchases of gasoline and Middle Eastern nations turn up air-conditioning.

Crude has sunk this year even U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels a day last month, according to U.S. Department of Energy data.

Crude could fall to $10 a barrel as the Organization of Petroleum Exporting Countries engages in a “price war” with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday.

“OPEC is basically saying we’re not going to cut production, we’re going to see who can stand lower prices longest,” Shilling said. “Oil is headed for $10 to $20 a barrel.”

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Iran Targets 45 Oil Projects To Boost Output : Bloomberg

Crude Reserves

Iran has selected 45 oil and gas projects to show international companies at a conference in London in December when new oil contract models will be discussed ahead of exploration auctions to double the country’s crude output.

The projects, including oil and gas exploration, will be discussed along with details of a new oil contract model at the Dec. 14-16 conference, Mehdi Hosseini, chairman of Iran’s oil contracts restructuring committee, said in an interview in Tehran. Iran hopes to boost crude production to 5.7 million barrels a day, he said.

The Persian Gulf nation’s output was 2.85 million barrels a day in July, according to estimates compiled by Bloomberg. Oil producers such as BP Plc and Royal Dutch Shell Plc have expressed interest in developing Iran’s reserves, the world’s fourth-biggest, when sanctions are removed following last month’s nuclear agreement with world powers.

“We will define projects in the oil and gas sector as much as feasible and necessary since we believe this sector will bring wealth and economic development,” Hosseini said. “As far as this conference is concerned, we have defined around 45 projects which include exploratory blocs at varying development costs.”

Iran may give companies two to three months to decide whether to bid on the projects, he said. “The exact length will be decided by the time of the conference.” Shortly after that, Iran will call for bids, he said.

“We consulted with almost all medium and major oil companies over our contractual contents and projects. And the feedbacks have been positive,” he said.

New Contract

Iran will adopt “risk service contract” models which will offer investors payback in the form of cash or oil allocation, he said. They won’t be allowed to claim ownership of the country’s energy reserves, he said.

“They would resemble production sharing but with different characteristics,” he said. “The international oil company, or the investing company, would be accepting certain risks in view of which it would be entitled to a portion of the oil thus produced. Or the reward of that risk is a share/portion of the oil.”

Iran’s production costs are $8 to $10 a barrel so, “our projects will be attractive to investors,” Hosseini said. Falling oil prices are in Iran’s interest at this point because high prices encouraged uneconomical fields, he said.

“The drop in prices from $100 a barrel to around $50 a barrel now is only in the short run,” Hosseini said. “Looking at the international oil industry over the long-run, the demand will rise and so will the prices.”

Production Boost

Pending the end of sanctions, Iran wants to boost oil production to about 15 percent of the Organization of Petroleum Exporting Countries’ output, or more than 4 million barrels a day, he said. “As OPEC’s share increases so does our share and we will need to build capacity. As a preliminary goal in the short run we plan to produce 5 million barrels a day and then go from that to 5.7 million barrels a day.”

Iran’s oil reserves are estimated at 157.8 billion barrels by BP Plc. That’s enough to supply China for more than 40 years. Iran can boost oil production by 500,000 barrels a day within one week after international sanctions are lifted, Oil Minister Bijan Namdar Zanganeh said in an interview with state TV earlier this month. Sanctions against Iran’s oil industry should be lifted by late November, he said.

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Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”

 

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Oil Bear Market Will Be Prolonged : Goldman Sachs

Oil dropped to the lowest in more than four months in New York on expectation a global glut that drove prices into a bear market will be prolonged.

Goldman Sachs Group Inc. estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust, analysts including Jeffrey Currie said in a report dated Thursday. U.S. crude supplies remain about 100 million barrels above the five-year seasonal average, Energy Information Administration data on Wednesday showed.

Oil moved into a bear market in July on signs the global surplus will persist as the U.S. pumps near the fastest rate in three decades and the largest OPEC members produced record volumes. The Bloomberg Commodity Index, which fell almost 11 percent in July, has resumed its decline.

“Prices are under pressure because we’ve got more and more crude coming out of the ground,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. “Questions about storage capacity have already been brought up.”

WTI for September delivery fell 49 cents, or 1.1 percent, to settle at $44.66 a barrel on the New York Mercantile Exchange. It’s the lowest close since March 19. Prices are down 16 percent this year.

Supply, Demand

Brent for September settlement dropped 7 cents to end the session at $49.52 a barrel on the London-based ICE Futures Europe exchange. It touched $48.88, the lowest since Jan. 30. The European benchmark crude closed at a $4.86 premium to WTI.

“It’s the familiar theme of oversupply and shaky demand,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “The negative reaction to yesterday’s inventory report set up for another drop today. We clearly have more than ample supply.”

About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January, according to the Goldman report. Global oil oversupply has risen from 1.8 million barrels a day in the first half of 2015, Goldman said. The balance between supply and demand may only be restored by 2016, Goldman said.

Shoulder Months

“While we maintain our near-term WTI target of $45 a barrel, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn,” the Goldman analysts said.

Crude supplies in the U.S. fell 4.4 million barrels to 455.3 million last week, the EIA said. Output expanded by 52,000 barrels a day to 9.47 million a day, the first gain in four weeks. Refinery utilization rose by 1 percentage point to 96.1 percent, the highest level since 2005.

Inventories of distillate fuel, a category that includes diesel and heating oil, rose 709,000 barrels to 144.8 million, the most since February 2012, the EIA report showed.

Ultra low sulfur diesel for September delivery rose 1.14 cents, or 0.7 percent, to settle at $1.5499 a gallon in New York. On Monday it closed at its lowest level since July 2009.

“Diesel isn’t up because of the fundamentals,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone. “It’s getting support from the upcoming refinery-maintenance season, the harvest season and anticipation of thermal needs later this year.”

The Bloomberg Commodity Index of 22 raw materials dropped 0.3 percent. Eighteen of the components, which include gold, have declined at least 20 percent from recent closing highs, meeting the common definition of a bear market.

Trading Alert : Oil Sector Is Not Yet At The Bottom

 

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon Mobil Corp. and Chevron Corp., the biggest U.S. energy producers, hunkered down for a prolonged stretch of weak prices after posting their worst quarterly performances in several years.

Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as the world’s largest crude producer by market value could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges.

Stung by the worst market collapse since the financial crisis of 2008, oil explorers are slashing jobs, scaling back drilling, canceling rig contracts and reducing or halting share buybacks to conserve cash. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon cut share repurchases for the current quarter in half to $500 million after net income fell to $4.19 billion, or $1 a share, from $8.78 billion, or $2.05, a year earlier, the Irving, Texas-based company said in a statement on Friday. The per-share result was 11 cents lower than the average estimate of 20 analysts in a Bloomberg survey.

For Exxon, refinery profits fattened by lower costs for crude were more than offset by weaker results in the company’s primary business, oil and natural gas production, Exxon said. The company’s U.S. wells posted a $47 million loss.

Spending Cuts

Exxon reduced spending on major projects like floating crude platforms and gas-export terminals by 20 percent to $6.746 billion during the quarter, according to the statement. International crude prices fell 42 percent from the previous year to an average of $63.50 a barrel.

Chevron’s profit dropped to $571 million, or 30 cents a share, from $5.67 billion, or $2.98, a year earlier, the San Ramon, California-based company said in a statement. The per-share result was well below the $1.16 average estimate.

Chevron’s biggest business unit — oil and gas production – – posted a loss as the second-largest U.S. energy company recorded a $1.96 billion writedown on assets and another $670 million charge for taxes and projects suspended because they no longer make economic sense.

“The write-downs will get worse into the end of the year as companies complete their end-of-the-year SEC filings,” Sankey said. “The market still looks very over-supplied with oil and we’re in peak demand season globally.”

Pessimistic Outlook

Exxon Chairman and Chief Executive Officer Rex Tillerson was among the first oil-industry bosses to shrink spending as the crude rout began taking shape more than a year ago. After cutting the budget by 9.3 percent in 2014, this year’s reduction may exceed the original 12 percent target, the company disclosed during an April 30 conference call with analysts.

Tillerson, an Exxon lifer whose 10th year as CEO began in January, has been pessimistic about the prospects for an imminent oil-market rebound. On April 21, he told a Houston energy conference that the supply glut and low prices will persist “for the next couple of years” at least.

Those remarks proved prophetic: international crude prices that rose 45 percent between Jan. 13 and May 6 have since tumbled 21 percent, inaugurating the second oil bear market in 14 months.

“Chevron was a disaster; Exxon was a disappointment,” Fadel Gheit, an analyst at Oppenheimer & Co. In New York who rates the shares of both the equivalent of a hold and owns each. “A rising tide lifts all ships, but when the tide goes down, all ships go down.”

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Linn Energy : Motley Fool Review

LINN Energy LLC’s Earnings Are Full of Surprises
LINN Energy LLC and LinnCo LLC both ax their monthly distribution to conserve cash.

Linn Energy Llc Permian Tall
SOURCE: LINN ENERGY LLC

With the price of crude taking a second leg down over the past few weeks, it’s forcing oil companies to take a hard look at their future plans. Hard choices are also being made with LINN Energy LLC (NASDAQ:LINE) and affiliate LinnCo LLC (NASDAQ:LNCO) now making the difficult choice to suspend monthly cash distributions as a means to conserve cash as the downturn persists. But that was just one of the many surprises LINN Energy and LinnCo unveiled to investors in their second-quarter report.

Surprise! We’re axing the distribution
After first halving the payout earlier this year, LINN Energy and LinnCo are now suspending it indefinitely. In commenting on the move in the earnings release, CEO Mark Ellis had this to say:

After careful consideration, management has decided to recommend to the Board of Directors that it suspend payment of LINN’s distribution and LinnCo’s dividend at the end of the third quarter 2015 and reserve approximately $450 million in cash from annualized distributions. The Board and management believe this suspension to be in the best long-term interest of all company stakeholders.

As Ellis points out, the move is being made to preserve cash as LINN will save $450 million over the next year by not paying distributions. It’s money the company can use to fix its balance sheet, which has come under a lot of pressure due to persistently weak oil and gas prices. While this is a very unpleasant surprise, in all honesty it’s a prudent move given how worried investors have grown over its debt-laden balance sheet.

Surprise! We’ve buying our bonds hand over fist
The second surprise is actually directly related to that balance sheet as the company announced it was taking advantage of investor fears to buy back a huge slug of its debt at a hefty discount. Over the past month, the company has repurchased $599 million of its outstanding senior notes for a total of $392 million, or a 35% discount to par value. This is actually a really great use of capital as LINN is basically earning a 50% return on its investment in buying back these bonds at such a discount.

With those repurchases, LINN has now reduced its debt by $783 million year to date, which will save it $54 million in annual interest payments. That’s a meaningful reduction in debt for the company and this isn’t likely the last of the debt repurchases as CFO Kolja Rockov hinted in the press release of “potential future repurchases.”

Surprise! We had better cash flow and production during the quarter
Another positive surprise was the company’s operational results for the quarter, which trounced its guidance. The company had expected to produce 1,100-1,220 MMcfe/d during the quarter but actually produced 1,219 MMcfe/d, which was 1.5% higher than the second quarter of last year. Further, as a result of production right at the high end of its guidance range, the company is now able to boost its full-year production guidance by 4% given what it sees on the horizon.

In addition to this, LINN Energy produced $71 million in excess cash flow for the quarter, which was a surprising bounty given that the company was expected to have a shortfall of $20 million for the quarter. The biggest driver here, aside from the higher than expected production, was a vast improvement in expenses. Overall, the company was able to reduce its lease operating expenses by 18% year over year.

The company expects these cost reductions to continue as LINN is reducing its full-year operating expense outlook by 6%, which will drive further improvement in cash flow. Overall, the company is expecting to pull a total of $225 million out of its overall cost structure as a result of interest savings and expense reductions.

Investor takeaway
There’s no way to sugarcoat things: The distribution and dividend cuts from LINN Energy and LinnCo sting. But given the persistent weakness in oil and gas prices it’s really the right move for the company to make until there’s a bit more clarity on prices. On a more positive note, the company did make significant progress on debt reduction and its operational results were actually quite good. That being said, LINN Energy and LinnCo have a lot of work to do considering the abundance of debt and no distributions to give investors a reason to keep holding.

For investors looking to limit risk, here’s a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday’s close with the highest ratios of debt to equity:

Company Ticker Debt – most recent quarter-end ($mil) Total equity ($mil) Debt/ equity Total return – November Total return – YTD
Ultra Petroleum Corp. UPL,-6.55% $3,426.000 $5.198 65,910% -13% -8%
Midstates Petroleum Co. MPO,-0.38% 1,669.150 $334.277 499% -23% -65%
Memorial Resource Development Corp. MRD,-0.32% $2,111.800 $436.278 484% -20% N/A
Isramco Inc. ISRL,-2.55% $112.712 $26.740 422% 7% 10%
Jones Energy Inc. Class A JONE,-5.25% $770.000 $182.937 421% -18% -30%
Exco Resources Inc. XCO,-9.85% $1,549.439 $427.042 363% -4% -43%
PetroQuest Energy Inc. PQ,-2.80% $422.500 $130.059 325% -21% -14%
Goodrich Petroleum Corp. GDP,-5.20% $609.464 $214.587 284% -27% -64%
Linn Energy LLC LINE,-25.93% $12,310.146 $4,932.133 250% -26% -35%
Halcon Resources Corp. HK,-2.91% $3,533.852 $1,517.866 233% -27% -41%
Total returns assume dividends are reinvested. Source: FactSet

Memorial Resource Development Corp. completed its initial offering in June, priced at $19 a share, for a total return of 14% through Friday’s close at $21.60.

Morgan Stanley Oil Warning: The Crash / Glut Continues

Morgan Stanley has been pretty pessimistic about oil prices in 2015,

drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.

This week, a revision: It could be much worse

Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check 

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.

2. Spending on new oil will fall: Check 

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.

3. Stock prices remain low: Check 

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.

4. Oil supply will drop: Uh-oh 

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.

OPEC Production Surges in 2015

Source: Morgan Stanley Research, Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”

“In that case,” they wrote, “there would be little in history that could be a guide” for what’s to come.

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