•  
  •  
  •  
  •  
  •  
  • Untitled Document
    Untitled Document

    Upstream News

    IHS: Escalating costs driving diminishing returns for oil and gas companies despite stronger oil prices

    Despite stronger oil prices, corporate returns on average capital employed (ROACE) are lower than in 2001, when oil prices were less than $30 per barrel, according to research from information and insight provider IHS (NYSE: IHS).

    "Our IHS study, which assessed energy company performance and capital returns, included more than 80 oil and gas companies," said Nicholas D. Cacchione, director at IHS Energy and a lead researcher on cost and energy company performance. "Collectively, these companies averaged an 11% ROACE in 2012 and 8.6% in 2013, both of which are weaker than the ROACE achieved in 2001 when the WTI (West Texas intermediate) crude oil price hovered at just under $27 per barrel. The WTI crude oil price averaged $94 per barrel in 2012 and $98 per barrel in 2013."

    Said Cacchione, "My guess is that shareholders are asking ‘What gives?' The culprit is cost escalation. While returns have increased in recent years, costs have accelerated at a rate that has squeezed margins. The more than $60-per-barrel increase in global oil prices since 2002 has been offset by significantly higher costs, and to a lesser degree, weaker US natural gas prices. Margins have basically been frozen."

    Looking at the upstream sector, which comprises the majority of business of the study universe; lifting costs have more than quadrupled since 2000 to greater than $21 per barrel. Finding and developing costs have followed a similar trajectory, reaching nearly $22 per barrel of oil equivalent (BOE) in 2013. Government fiscal take (based on financial disclosure), which excludes the impact of royalty volumes in the upstream sector, increased from 49% of pretax profits in 2000, to 60% in 2013.

    "The integrated oil companies earned a 15 percent ROACE since 2000, which is substantially higher than the 11% posted by pure E&P (exploration and production) companies," said Lysle R. Brinker, director of company research at IHS Energy. "The outperformance by the integrated oil companies can largely be attributed to their geographically and functionally diversified portfolios, which benefit from capital spending programs that are generally more disciplined. They are also aided by the lower-cost basis of the legacy assets that often comprise a large portion of their operations."

    "As a result of this ongoing cost pressure," Brinker said, "companies are increasingly laser-focused on cost containment and exercising greater discipline around the return on their capital investments. There is greater scrutiny on capital spending at all levels, which will become even more pronounced as the year progresses. Every investment has to pass muster on several fronts before it will be funded, since there is significant internal competition for that capital."

    GDF SUEZ E&P UK reports Southern North Sea gas discovery

    GDF SUEZ E&P UK Ltd. has reported a new gas discovery in the UK Southern North Sea (SNS). The Cepheus 44/12a-6 exploration well has encountered a gas column within the Permian Lower Leman Sandstone, which was the primary reservoir target.

    The well was spudded on March 9 and drilled to a total measured depth (MD) of 12, 125 feet (11,730 feet TVDSS – total vertical depth subsea). It was deviated north-eastward from a top hole location in Block 44/12a to the target location in Block 44/12b (License P1731).

    Equity interests in the P1731 license are operator GDF SUEZ E&P UK (34.48%) and partners Centrica North Sea Gas Ltd. (48.28%) and Bayerngas E&P Ltd. (17.24%).

    Cowan and Company analysts: North American budgets heading higher

    Research analysts with Cowan and Company have recently checked with 53 of the larger spenders of E&P dollars in the US and found that a total of $1.4 billion has been added to E&P budgets since the publishing of Cowan and Company's year-end E&P spending survey.

    The analysts said, "Based on this sample size, as well as continued stronger oil and natural gas prices and cash flows, we are raising our forecast of US E&P spending to a gain of 10% in 2014 compared with a former estimate of 5%. Among the companies making meaningful changes in their US E&P budgets are Concho Resources, Cimarex, Apache, Noble Energy, Matador Resources and Comstock Resources. The change in forecast is most significant in the Permian Basin, where we see a trend toward larger and more dense completions. We believe that the increases have implications for 2015, and we are raising our estimate for 2015 to a 10% increase in US E&P spending from a 7% gain previously."

    The analysts' forecast for growth in Canadian E&P spending is being increased to 6% (from 1% in their survey) and 8% in 2015 (up from 5%). The analysts are making no change in their forecasts for international E&P spending growth, which remains up by 4% in 2014 and ahead by 5% in 2015.

    "We are modestly increasing our 2014–2015 EPS estimates for all companies with North American land exposure and making small upward adjustments in our price targets," the analysts stated.

    Energy sector optimistic on pricing

    As uncertainty persists in the energy sector, institutional investors and senior energy industry executives are optimistic about price of natural gas and crude oil. Seventy-six percent of investors and executives polled believe that the current $100+ price levels for crude oil will be sustained or increased, while 74% of investors expect natural gas prices to be sustained or increased over the next 12 months. The survey of 80 energy, oil and gas professionals was conducted by RBC Capital Markets at the firm's NYC conference in early June.

    This translates into a bullish view on oilfield services and E&P stocks. Among the industry's sub-sectors, 61% of respondents viewed either oilfield services or E&P as having the most investment upside between now and the end of 2014.

    "Our global energy team expects North American onshore shale drilling to be the primary driver for revenue and earnings growth for Oilfield Services and E&P companies into 2015,"said Kurt Hallead, co-head of Global Energy Research for RBC Capital Markets.

    Industry hurdles

    Resolution of issues including the potential approval of the Keystone XL pipeline and crude oil exports from US shale basins could have a significant impact on how investors approach the domestic energy sector. Approximately 45% of industry executives and investors expect approval of Keystone after 2017, with 41% expecting approval between 2015 and 2016.

    Meanwhile, 74% of respondents believe crude exports will eventually be permitted, with 31% expecting the change between 2015 and 2016 and 43% expecting the current ban to be lifted in 2017 or later.

    "The economic benefits for crude oil exports make sense whether it be GDP growth, jobs, trade balances, or federal or state revenue streams," said Hallead. "The template is in place given the approval of LNG exports, and we ultimately think that crude exports will be permitted."

    Report predicts surge in world subsea expenditure

    Global subsea hardware capex could total $117 billion between 2014 and 2018, according to Douglas-Westwood's (DW's) latest market forecast. This represents growth of more than 80% compared with the preceding five-year period, DW says, although the global financial crisis in 2009 and the Gulf of Mexico oil spill in 2010–2011 both limited growth in subsea hardware spend during 2009–2013. Also, subsea tree installations last year were lower than expected mainly due to delays in big projects offshore Brazil and West Africa.

    The strong growth to come is down to a combination of a favorable outlook in the established deepwater provinces and the start of field development in new frontier areas such as the Eastern Mediterranean and East Africa.

    Subsea hardware spend is expected to be highest in Africa, Latin America, and North America, with these regions providing almost half of the total expenditure.

    Over the next five years, DW also foresees around 44% of total spend committed to projects in water depths greater than 1,000 meters (3,281 feet).

    Subsea production equipment will account for almost half of all expenditure by component. The SURF (subsea umbilicals, risers, and flowlines) market makes up over a third of expenditure, driven by the development of remote fields, new project phases, and the tieback of satellite fields into subsea hubs.

    Pipelines incur the remaining spend, driven by a few large offshore pipeline projects and smaller tieback pipelines.


    BRIEFS


    US natural gas output rose 0.6% in May

    US exploration and production companies were at full throttle in May, producing 67.7 bcf/d of natural gas in the Lower 48 states, according to Bentek Energy. This was up 0.6% from the previous monthly high set in April. May 2014 saw nine days of production in excess of 68 bcf/d and 10 days of the highest production levels in the history of US gas production, the analysis showed. Production peaked on May 26 at 68.2 bcf/d. Average May 2014 gas production was up 3.0 Bcf/d or 4.6% from May 2013 levels.

    NA oil output increases to outpace Middle East

    By 2020, increases in North American oil production will outpace that of the Middle East by 4:1 on a per barrel basis, and by 2030, North American output will increase by 390 million tonnes of oil equivalent (mtoe) from 650 mtoe in 2009, according to long-term analysis of global energy trends by Wood Mackenzie.

     

    Most Popular

    Related Articles

    AFGlobal promotes COO Samford to president and CEO role

    06/15/2015 AFGlobal Corp. has promoted COO Curtis Samford to the role of president and CEO. Samford succeeds Gean Stalcup, who has served in this capacity for the past five years. Stalcup has been named chair...

    Ezra secures $115M in contracts for North Sea, West Africa, and Asia

    06/15/2015 Ezra Holdings Ltd. says that its Subsea Services division, EMAS AMC, has won several global contracts, including one for rigid pipelay on the Aviat field development in the UK North Sea, under the ...

    Odfjell wins Johan Sverdrup drilling contracts

    06/15/2015

    Statoil, on behalf of the Johan Sverdrup license, has awarded two contracts at a total value of more than NOK 4.35 billion to Odfjell Drilling for drilling wells on the Johan Sverdrup field.

    DW comments on ultra-growth in ultra-deep fields

    06/01/2015 In its DW Monday report for June 1, Douglas-Westwood says that, apparently undeterred by low oil prices, oil and gas output from ultra-deepwater (greater than1,000 meters in water depth) fields wil...

    OneSubsea awarded $330M contract for subsea production system offshore North Africa

    05/29/2015

    OneSubsea, a Cameron and Schlumberger company, has been awarded a subsea production systems contract totaling more than $330 million for a gas project offshore North Africa.

    DW: Subsea hardware spend to remain high

    04/10/2015

    In its new World Subsea Hardware Market Forecast 2015–2019 report, Douglas-Westwood forecasts that global subsea hardware CAPEX will total $145 billion between 2015 and 2019.

    More Oil & Gas Financial Articles

    AFGlobal promotes COO Samford to president and CEO role

    Mon, Jun 15, 2015

    AFGlobal Corp. has promoted COO Curtis Samford to the role of president and CEO. Samford succeeds Gean Stalcup, who has served in this capacity for the past five years. Stalcup has been named chairman of the board for AFGlobal.

    Ezra secures $115M in contracts for North Sea, West Africa, and Asia

    Mon, Jun 15, 2015

    Ezra Holdings Ltd. says that its Subsea Services division, EMAS AMC, has won several global contracts, including one for rigid pipelay on the Aviat field development in the UK North Sea, under the auspices of the frame agreement that the company signed with Apache in the North Sea, bringing the total contract value to more than $115 million, including options, for the Group.

    Odfjell wins Johan Sverdrup drilling contracts

    Mon, Jun 15, 2015

    Statoil, on behalf of the Johan Sverdrup license, has awarded two contracts at a total value of more than NOK 4.35 billion to Odfjell Drilling for drilling wells on the Johan Sverdrup field.

    DW comments on ultra-growth in ultra-deep fields

    Mon, Jun 1, 2015

    In its DW Monday report for June 1, Douglas-Westwood says that, apparently undeterred by low oil prices, oil and gas output from ultra-deepwater (greater than1,000 meters in water depth) fields will continue the relentless growth seen in recent years.

    OneSubsea awarded $330M contract for subsea production system offshore North Africa

    Fri, May 29, 2015

    OneSubsea, a Cameron and Schlumberger company, has been awarded a subsea production systems contract totaling more than $330 million for a gas project offshore North Africa.

    OGFJ photo of the day


    Click to view slideshow

    Oil & Gas Jobs

    Search More Job Listings >>
    Subscribe to OGFJ