The Business of Oil and Gas

PowerGen 2016

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I have been asked to serve on a panel discussion at Power Generation Week December 11 - 15, 2016 in Orlando. This panel discussion will discuss the electricity business model of the future and the state of the industry in 2030. Panelists will discuss fuels, transmission & distribution, generation, regulation, workforce dynamics, and customer experience. The changes predicted to take place in the next 15 years will be more dramatic than the changes experienced over the last 50 years. Changes in every sector of the power generation market will significantly alter the business model of tomorrow. Come join the debate. I have been asked to address the future of fuel markets.  There will be new ideas presented that upstream companies should find useful in charting strategies for the next 15years. Register Here   PGI 6A - 2030: A View of the Electricity Business Model of Tomorrow - Panel Discussion Room: S330C Session...
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OPEC Head Fake

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The Wall Street Journal reported today that oil prices continue to rally based on the news that OPEC has reached some kind of deal to reduce supply. We have seen this movie before and the report should be the last reason for a bullish move in oil. Two reasons mentioned in the article: OPEC has over the 40 years I have observed has rarely and never for long sustained production cutbacks. Now that Russia is reported to be part of the deal the cohesion is even more frayed. Add to that the simmering tension between Saudi Arabia and Iran and the boiling hot war in Syria, and little should be expected for this deal to hold. Any reduction in OPEC+Russia supply will be gladly filled by the third largest producer, USA’s shale producers. Marginal costs have declined and a sizeable inventory of yet to be completed wells is waiting. Also, expect...
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Good Money Chasing Bad

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This article from the Wall Street Journal provides the background. But the real question is “Why are investors continuing to fund the walking wounded? First, keep in mind that assets do not declare bankruptcy. Second, companies, do. Third, despite legal proceedings, assets will continue to produce. Over supply will continue as long as revenue returned to those assets exceeds cash operating expense. Thus, one could argue bankruptcy is irrelevant to the oversupply of oil and gas. About all that has happened in oil and gas bankruptcy is the equity holders get wiped out. New investors arrive with fresh financing to buy the claims of the secured creditors and the dance goes on. A feature of bankruptcy is Debtor-in-Possession (DIP). A DIP can obtain interim financing to keep operating while the court proceedings are resolved. DIP financing has priority over all other claims. If it is withheld, the dance stops and everyone...
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A recent Wall Street Journal article opens a window into a new and unsettling world. More chaos in the oil markets and more instability in the Middle East. Saudi Arabia sought to raise crude oil prices by driving US Shale producers and other low cost producers out of business. That is, by setting the oil market on fire with a flood of oil, they would set a price so low, US producers would have to shut in and stop drilling. They reasoned it would do two things. Reduce supply and drive up the price; and, Allow them to recapture market share. But the strategy blew up in their faces for several reasons. They underestimated the ability of US producers to drive costs lower. Never bet against innovation. They underestimate their own cost of production. The Royal family has for decades kept the population content and docile with huge subsidies and lucrative...
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It is pretty clear there is a wide divergence in performance among the largest North American oil and gas production companies. At mid-year 2015 we did a study on the largest players, those that at time had a market capitalization (total value of equity) greater than $1 Billion. That screen resulted in approximately 90 companies engaged in exploration and production in the US and Canada. The study illustrated in pretty stark terms that during the 10 year period 2004-14 only a few companies met the number one performance criterion, Return on Invested Capital (ROIC). Further, this was the boom period culminating in oil prices over $100 per barrel. If a company were to succeed, this would be it, yet only a few did. One year later, it seems sensible to take another look to see how the Stars, Contenders, Vulnerable, Struggling and Troubled companies had performed during the downturn. To say...
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