With the recently concluded nuclear deal between Iran and the P5+1
countries, oil prices have already started heading downward on sentiments
that Iran's crude oil supply would further contribute to the already rising
global supply glut. The economic crisis in Greece, OPEC's high production
levels and China's market turmoil have created more pressure on oil prices,
making a price
rebound look highly unlikely in the near future.
So, with the prices of both Brent and WTI moving towards $50 per barrel,
the short to medium-term outlook for oil remains mostly bearish. This is bad
news for the U.S. shale sector which is already dealing with rising debt and
the ever-increasing risk of default.
A recent Bloomberg report stated that U.S. driller's debts stood at $235
billion at the end of first quarter of 2015, which is quite worrying.
Does this mean that the U.S. oil sector is likely to witness a lot more
layoffs than we have seen so far? Surprisingly, a recent IHS
study had revealed that the U.S. shale sector has been boosting job
creation in addition to supporting around 1.7 million jobs in U.S.
All this as the overall unemployment rate in U.S. has been declining since
previous years. But with rising negative sentiment pertaining to oil prices,
is U.S. the shale sector prepared to face one of its biggest tests yet? Will
the industry be able to sustain another long period of low oil prices or will
it once again resort to trimming its workforce?
Low oil prices will most likely result in more job losses
Since the oil price collapse of last year, we have seen how oil field
services and drilling companies have slashed thousands of jobs in order to
reduce costs and cut their operational spending. Some of the major oilfield
companies like Schlumberger, Halliburton and Weatherford have already
announced close
to 20,000 layoffs as of February 2015.
However, the markets turned bullish when oil prices were hovering in the
range of $60 per barrel during the last two months, raising hopes that oil
companies would be sending close to 150 drilling rigs back into operation.
Now that oil prices are again moving towards the $50 per barrel mark, high
drilling costs make almost a third shale oil in the U.S. too expensive to
produce. Even
Goldman Sachs has admitted that the $50 per barrel oil price level would
deter any kind of a drilling recovery in U.S. this year, as there would only
be around 20 to 50 rigs returning to work by end of this December. In fact,
analysts from Goldman predict WTI will fall to $45 a barrel by October this
year.
"Oil rebalancing remains in its early stages with the current cash
flow and funding mix stalling it, we believe that as fundamentals reassert
themselves and we move past the seasonal peak in demand, oil prices will
continue to sequentially decline," said analysts from Goldman Sachs.
U.S. shale sector faces another challenge as hedges expire
The U.S. shale industry had been somewhat insulated from the effects of
low oil prices in the past as companies had hedged
their production. This meant that companies had fixed their future
selling price in order to temporarily circumvent the ongoing volatility in
the oil markets. Since most of the companies had hedged their production
before the last oil price crash, they were well protected from the erratic
oil price movements. However, the situation is quite different now as most of
these hedges are about to expire. For small and medium shale companies that
had hedged their production at $85 or $90 per barrel previously, having more
of their production exposed to $50 per barrel prices will be painful.
What to expect over the coming months
The coming few months will prove challenging for the sector, and some
small and medium U.S. producers may start missing their debt repayments or
even file for bankruptcy. Quicksilver Resources and American Eagle Energy are
two of the six U.S. based companies that have filed for bankruptcy in 2015 so
far. Sabine Oil and Gas Corp. is the latest, and the
biggest, U.S. producer to file for bankruptcy so far.
Even mergers and acquisitions have slowed down considerably for the U.S.
oil and gas industry in 2015. If the present trend persists, companies will
have no choice but to cut their workforces even further to remain competitive
and reduce their rising overheads. If oil prices remain in the range of $50
per barrel for longer than expected, even big operators such as Exxon Mobil,
Chevron and ConocoPhillips (who have so far not made any major layoffs) could
start downsizing their workforce.
