Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on August 9, 2015 at 3:24

Hope you're right, Mike.  I think the dynamics of commodity price fluctuations regarding hydrocarbons have fundamentally changed with the advent of unconventional reserves.  The historic peaks and valleys of price fluctuations should not be nearly as pronounced going forward.  And long periods of relatively stable prices should be the norm.  The quite large reserves and the ability to bring them to market quickly and in quantity will moderate any future price increases due to increased global demand.  At this point I don't see any short term advantage for US energy companies related to lifting the ban on crude exports.  The global price of oil is significantly depressed and I don't see that adding additional supply will have any result other than to depress prices further, and longer.  In fact repealing the ban is likely to kick off a price war with OPEC countries.  IMO crude could easily drop another $10 to $15/barrel under such a scenario.  Sub $35/barrel prices would put the economics for even the most cost efficient US unconventional basins at risk.

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Permalink Reply by Joe Aldridge on August 9, 2015 at 4:05

Skip,

I agree. Could loose another $15 a barrel. As I said a couple of weeks ago the price could go to $30 or below; especially, with Iran's oil coming to market.The Saudi's started something and where it will end nobody knows. 

Its interesting: The President may have done us a favor in not allowing the Keystone Pipeline to go forward. Only time will tell.

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Permalink Reply by Skip Peel - Mineral Consultant on August 10, 2015 at 5:02

I hope you are not right, Joe.  But I suspect that you are close.  Hedges allowed a lot of over leveraged energy companies to keep the lights on through the first two quarters of the year.  As those hedges expire there will be no opportunity to replace them at any advantage to the producers.  When the semi-annual reserve estimates are finalized lenders will almost surely lower the dollar value of lines of credit.

Oil Futures Signal Weak Prices Could Last Years

The oil market indicates that prices could stay lower for longer, delivering a fresh blow to hard-hit energy exploration-and-production companies

By  Nicole Friedman  Updated Aug. 10, 2015 9:01 a.m. ET wsj.com

The oil market is signaling that prices could stay lower for longer, delivering a fresh blow to hard-hit energy exploration-and-production companies.

Benchmark U.S. oil futures for September delivery are nearing the six-year low hit in March. But contracts for delivery in later years have taken an even bigger hit, with prices for 2016 and 2017 already trading below their March lows.

That indicates that investors, traders and oil companies see the global glut of crude oil persisting beyond this year.

Companies making long-term investment decisions rely on the prices of futures contracts one or more years in advance. Producers trade futures and options contracts for coming years to lock in prices for the oil they plan to sell in those years.

A number of U.S. shale-oil producers say they can profitably increase production if prices rise above $65 a barrel. On Friday, front-month oil prices fell 79 cents, or 1.8%, to $43.87 a barrel, while futures for delivery in December 2016 settled at $51.88 a barrel. The most expensive benchmark oil-futures contracts, which were dated for delivery in 2022 and 2023, settled at $63.26 a barrel.

For many producers, such as Diamondback Energy Inc. and Marathon Oil Corp. , later-dated contracts are now too cheap to justify locking in prices. That means producers are likely to enter 2016 with fewer price hedges on the books than usual, if they have any at all.

Companies without price protection in 2016 could be forced to cut back further on new drilling if prices remain below their break-even costs.

“I think it’s a fair assessment that just about nobody is putting on hedges at this point,” said Jason Wangler, an analyst at Wunderlich Securities. “Why lock in the bottom?”

The drop in later-dated prices surprised some analysts and investors. Oil trader Andrew Hall, who is known for making long-term bullish oil bets, wrote in an investor letter dated Aug. 3 that he didn’t foresee the “pessimism” in the oil market. Mr. Hall’s $2.8 billion hedge-fund firm Astenbeck Capital Management LLC fell 16.6% in July.

 “It was notable that last month’s collapse in prices was led primarily by heavy selling of deferred futures contracts,” Mr. Hall wrote. “The assumption is that prices will be capped for the foreseeable future by the cost of producing shale oil in America.”

Hedging has boosted producer profits this year, as some companies are still able to sell oil at $90 a barrel or higher, prices that they locked in a year or more in advance. Many companies are counting on prices rising from current levels. If the forecast prices indicated by the futures market turn out to be correct, 10 of the largest U.S. independent producers will outspend their cash flow by $11.4 billion next year, according to investment bank Tudor, Pickering, Holt & Co.

Banks review the value of companies’ oil and gas reserves, which can be used as collateral for loans, in the spring and fall. If banks price these reserves based on long-dated futures prices, their value could drop significantly in the coming review, analysts said, shrinking the amount of money that production companies can borrow based on those reserves.

“I think the banks have less flexibility with the redeterminations in the autumn,” said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston, which helps companies hedge. “It’s going to be a tough round this go-around.”

The energy sector of the S&P 500 has fallen 14% since oil prices hit their 2015 high in June, while the broader index is down 1.3% in the same period.

Producers rushed to lock in hedges when prices rallied above $60 a barrel in May, which pushed prices in later years above $65 a barrel. But concerns about Chinese growth and an increase in U.S. drilling sent prices plunging in July. In second-quarter earnings, some U.S. producers announced record oil output.

“We really just were able to begin to establish a position in 2016 before the market kind of fell on us,” said J.R. Sult, chief financial officer of Marathon Oil, in a Thursday earnings call. “Would I like to have more hedges on today? Yes.”

Travis Stice, chief executive of Diamondback Energy in Midland, Texas, said he doesn’t intend to hedge more of the company’s 2016 production unless crude prices rise to $65 a barrel or higher.

Futures contracts for delivery a year or more in advance demonstrate what traders are willing to pay for future barrels. But Still, long-dated futures are typically a poor indicator of where prices are headed.

Later-dated futures prices traded at a steep premium to front-month prices early in 2015 as concerns mounted that some regions would run out of space to store crude oil. But crude stockpiles started to shrink in the spring, as refineries ramped up activity due to robust global gasoline demand.

At the same time, a nuclear deal between Iran and six world powers raised the prospect that with sanctions lifted, Iran would ramp up crude exports in late 2015 and 2016. Reduced worries about storage space and the likelihood of growing Iran output pushed down later-dated prices.

“The companies are feeling more pain today than they did two months ago,” said Will Riley, co-portfolio manager at Guinness Atkinson Asset Management Inc., which oversees about $300 million in energy-equity investments. Guinness Atkinson has cut exposure to highly indebted oil producers.

“They are starting to look forward to the end of this year and into 2016,” Mr. Riley said. “Spending is only going to be increasingly constrained.”

— Erin Ailworth contributed to this article.

Write to Nicole Friedman at nicole.friedman@wsj.com

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Permalink Reply by Joe Aldridge on August 10, 2015 at 22:41

Sad to say but I agree. Good article; just not very encouraging as far as a mineral/royalty owner is concerned.

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Permalink Reply by Skip Peel - Mineral Consultant on August 11, 2015 at 0:55

Mineral owners need to be aware of current condition, have access to fact based projections and be familiar with the nature of the Exploration & Production business in order to make inform decisions in regard to the management of their asset. I think that holds true regardless of whether a current trend is positive or negative. The dynamics of the energy business have changed significantly in the last ten years.  All mineral owners need to have a grasp of how things work under this new paradigm.  Making decisions based on what was true in the past can lead to unintended and less than favorable outcomes.  Minerals should be viewed as other assets and treated accordingly.

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Permalink Reply by Krkyoldhag on August 11, 2015 at 3:42

I got a small check from Samson last week .. first one in a year.  And read that they will file on 8/15.

I never anticipated anything on my minerals.  I did not increase my spending based on that small income. 

But I know people who did, who are looking at maxed out credit cards they gave adult children, and having to cut back expenses.

Thing is..I don't think they will be able to salvage much since they bought into the spend baby spend mode. 

You read about lottery winners who go broke..well its hard to understand how someone with a $300,000 annual income for past few years could manage that.  But is happening.  The spigot got cut off...

Don't think oil and gas income will get better for awhile.  Better go back to your old jobs if yo

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Permalink Reply by Gale on August 11, 2015 at 5:44

Completely agree Krkyoldhag, it purely a gift from God and needs to be used as such. I always kept my job and was blessed beyond words with this income when I needed it most as I had a very very ill child. I wish I could have saved it but my sons health was most important and it enabled me to care for him. I still consider it a gift from my grandparents and although I want what's mine I'm ok without it. I just pray someday it shall return and we once again can enough the gift during my lifetime, if not maybe during my children's lifetime.

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Permalink Reply by Franks on August 11, 2015 at 11:03

Went to lunch with a neighbor today who keeps saying that state and city govts are hiking fuel taxes in order to balance their budgets (shifting monies).  Governor Huey P Long used to say basically the same thing ;)

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Permalink Reply by Skip Peel - Mineral Consultant on August 11, 2015 at 11:12

I think your neighbor is confused.  LA municipalities are currently not allowed to levy taxes on gas and diesel.  The state legislature has been debating raising the state gas tax and several of the members who don't want to vote for a tax hike have suggested allowing local governments to levy a fuel tax for use in road maintenance and construction within their jurisdiction.  The fact is a bump in the state tax is desperately needed as inflation has reduced the buying power and construction costs have gone up.  The non-profit trade group lobbying the legislature is suggesting a 10 cent increase to 30 cents per gallon.  I'd pay that in a second and would also consider a tax for city and parish road work.  Shreveport streets are terrible from long neglect and there is not enough money in the city's coffers to do more than put a small dent in the deferred maintenance back log.  As long as the revenue stream is dedicated to roads I think a lot of tax payers would be willing to pay it.

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Permalink Reply by tc on August 11, 2015 at 11:48

They did that in PA and now in Pittsburgh we get the privilege of paying $2.75 a gallon or $.50 more than Ohio.  Then you get the privilege of thinking about the high gas prices while you wait 2 hours for an 8 mile detour as they completely shut down a major interstate into and out of Pittsburgh for a whole weekend for a paving project and they still have many more weekend shutdowns still to go.  Actually I am for the improvements, but like snow storms they are better enjoyed from the comfort of your home than being out in them.

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Permalink Reply by Krkyoldhag on August 11, 2015 at 11:11

God's blessings are just that.  Good for you.  I know you kept your friends close too.

I feel so sorry for those out there that do not have comfort in the certainty of His love.

Recently I have had to experience some serious health issues and muddle thru differing plans of care.

I feel safe; I feel that I am cushioned in a large hand soft as a cloud; I am not afraid.

You have that.

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Permalink Reply by olddog573 on August 14, 2015 at 14:25

"t said it will continue producing oil and gas from its properties in North Dakota, East Texas and elsewhere, maintain its workforce and continue to pay royalties"

http://fuelfix.com/blog/2015/08/14/samson-resources-in-restructurin...

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