A grim narrative plays out

US independents are bracing for their worst results in years when they begin reporting third quarter earnings in coming weeks. But a bleak oil market outlook raises the question: How much worse can it get?

“The narrative for Q3 earnings season will be grim, both with regard to current industry conditions as well as the threatening visibility heading into 2016,” investment bank Simmons & Company said in a recent note. 

The dip in the market after a brief second quarter recovery has rendered insufficient the massive cost cutting measures of companies such as ConocoPhillips, Continental and EOG. Oil prices held below $50/bl through the quarter, and with an outlook of a “lower for longer” market, companies are under pressure to cut costs further to find ways to fill the gap between revenue and spending.

So far this year, almost every independent saw their net cash flow drop into negative territory. They have raised more debt, sold shares and assets and pulled back on drilling to close that gap.

“The vast majority of oil producers are still spending beyond their means, and absent much higher oil prices, they are self-liquidating,” US investment bank Oppenheimer said. “Based on the current strip, we expect 4Q15 earnings to be even lower. The weak earnings outlook is likely to spill over to 2016 and beyond.”

Recent data on drilling activity and output show the pain producers are under. The US rig count dipped below 800 for the first time in the current downturn, to its weakest since 2002.

Crude output in major US shales will fall by 93,000 b/d to 5.12mn b/d from October to November, the Energy Information Administration (EIA) said. Barring the top producing Permian basin, most of the other areas including the Bakken, Eagle Ford, Niobrara and Marcellus formations will post a drop, it said.

“August is almost always an up-month. This is a reflection of what’s really happening in the industry in this prolonged low price environment,” said North Dakota’s Department of Mineral Resources director Lynn Helms. North Dakota is home to the Bakken formation, the third most productive US shale field.

Yet, asset sales, further reduction in spending, cost cuts and improvements in technology will help the industry cope with the downturn. Larger producers “have the required flexibility to tide them through the near term at the very least,” Wood Mackenzie said, while smaller and financially stretched companies are likely to “eventually” fail.

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