Giving up on 2016

For the US oil and gas industry 2017 can’t come fast enough.

From oilfield services providers to the US independents who have reported their earnings so far for the fourth quarter, the industry has largely given up any hope of a recovery in drilling activities in 2016 and is preparing for another year of pricing pressure. 

“Any significant recovery in our activity level will be a 2017 event,” chief financial officer Simon Ayat of the world’s biggest oilfield services company Schlumberger said.

“The reality is, due to the macro uncertainties, many of our customers are managing their businesses in real time, rig by rig,” rival Halliburton’s chief executive David Lesar says. “Accordingly, we are going to take this market week by week and in some cases crew by crew.”

Independent producer Hess will lower its 2016 capital budget by 40pc from a year earlier to $2.4bn amid the plunge in crude prices. The new target is 20pc lower than the guidance of $2.9bn-$3.1bn given in October. Key Bakken producer Continental Resources cut its 2016 capex by 66pc to $920mn.

While Hess and Continental still have room to maneuver, smaller companies or those with larger debt levels are feeling the heat. Sandridge Energy has retained Kirkland & Ellis as legal advisers and Houlihan Lokey as financial adviser to guide them on financial and strategic transactions. Sandridge suspended dividend payments on its 8.5pc convertible preferred stock earlier this month after halting payout for its 7pc preferred stock in September.

Chesapeake suspended dividends on each series of its convertible preferred stock, saving the producer around $170mn in cash. The firm stopped paying common stock dividends from the third quarter, saving $240mn.

A third of US oil and gas companies with the weakest balance sheets are at risk of bankruptcy amid the precipitous drop in crude prices, Wolfe Research managing director Paul Sankey said recently.

“What matters now is the balance sheet and rock quality,” Sankey said.

The World Bank lowered its 2016 global crude price forecast by $15/bl to $37/bl and projects a much slower recovery from the present lows than from previous periods of sharp price declines. The 2016 crude forecast would amount to a 27pc year-over-year decline in price, following a 47pc decline last year when crude prices reached their lowest level since 2004.

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