With oil prices low and showing no sign of an immediate rebound, the industry
is beginning to pull back on spending.
Oil prices have dropped around 30
percent since summer highs, raising fears among producers across the
globe. Yet, many oil majors are relatively diversified, with large holdings
downstream. For example, ExxonMobil and Chevron have been insulated in the
third quarter because of their large holdings in refining. Steep declines
in oil prices may hurt their production sectors, but with lower priced oil
as an input, big oil's refining assets become more profitable.
For the third quarter, ExxonMobil reported a 3
percent rise in earnings compared to quarter three in 2013. That was
largely driven by the Texas-based oil giant's refining
assets, which saw its profits rise by more than 70 percent from $592
million to $1.02 billion. Chevron's refining program succeeded in quadrupling
its profits in the third quarter, more than offsetting the hit the company
has taken from the slide in oil prices.
Other companies that are not as large or integrated across various subsectors
of the oil industry are not as shielded from the current soft price environment.
And there are signs that a slowdown is beginning to take shape.
Oil services firm Baker Hughes reported another
drop in the active rig count in early November, with oil rigs declining
by 14. With 1,568 rigs in operation, the oil rig count is now at its lowest
level since August, and down 49 rigs since a peak in October. Rigs could
decline to 1,325 in 2015, according to some projections.
While some companies appear undaunted, vowing to maintain or even increase
production, others are beginning to pare back spending plans. Continental Resources,
a major oil producer in North Dakota's Bakken play, has
stated that it won't deploy more drilling rigs next year. Pioneer Natural
Resources, with large holdings in the Eagle Ford and Permian basin, has hinted
at more modest plans for 2015 due to lower oil prices.
The companies that service the oil producers are also on the frontlines, often
feeling the brunt of a pullback in drilling activity quickly. Transocean, a
major offshore oil drilling contractor, reported a nearly $2.8
billion impairment charge during the third quarter, which was "due primarily
to the decline in the market valuation of the company's contract drilling services
business." In other words, lower oil prices hurt demand for Transocean's drilling
rigs.
Transocean's 29 ultra-deepwater drilling rigs had accumulated 296
combined days of being out of service in the third quarter. That was
an enormous increase over the previous two quarters - 110 days of out-of-service
days in quarter two, and just 98 days in the first quarter. Even worse, the
company expects the rigs to be inactive for a total of 435 days in the fourth
quarter.
Short sellers are even stepping up their positions against oil field service
companies as they sense an opportunity. Reuters reported on
several European firms that are starting to come under fire from short sellers.
Nevertheless, the selloff in oil prices could be overdone.
OPEC's Secretary-General Abdullah al-Badri tried to ease concerns, speaking
at a conference in Abu Dhabi on November 10. "Please do not panic, things
will fix itself," he said. On its face, that response would seem to suggest
that OPEC thinks prices have bottomed out. On the other hand, Kuwait's Oil
Minister suggested that
OPEC will not cut its production target, and echoing al-Badri's comments, he
said that "prices will settle down once surplus oil is absorbed.
No decision has been made yet, and OPEC will meet at the end of November in
Vienna to decide its next move. But merely allowing the market to sort itself
out while maintaining current production levels will almost certainly spark
a negative reaction in the oil markets.
That would put greater pressure on oil producers and oil service companies
around the world, potentially forcing further cutbacks in production plans
with the weakest players and the highest cost regions feeling the worst of
it.
Source: http://oilprice.com/Energy/Energy-General/Ear...g-Activity.html
By Nick Cunningham of target="_blank" Oilprice.com
