Workers in South Korea spraying antiseptic.
I’m no fan of alarmism, whether it be about energy, the environment or any other subject, but the situation for the domestic oil and gas industry has grown somewhat alarming over the past two months. Since early January the S&P Oil & Gas Index has plunged 32%. Investors appear convinced not just that there is oodles of oil in the world but that the spread of Coronavirus brings the risk of economic flatlining in the biggest growth market for oil — China.
With the virus set to spread and the OPEC+ group running out of options to contain the oil glut, the price of West Texas Intermediate (WTI) crashed through the important $50 level this week, and promises to slide further. Chevron yesterday sent home 300 workers in London over virus fears. Thus, a year that began with a fairly promising outlook is rapidly devolving into one that will present a fight for survival for some domestic producers.
The statement on Tuesday by Dr. Nancy Messonnier, an official at the U.S. Centers for Disease Control and Prevention (CDC), that spread of the Coronavirus in the U.S. was “inevitable,” and that citizens here should begin preparing for an outbreak will certainly work to further inflame the markets. President Donald Trump has reserved television time for a statement designed to calm the situation on Wednesday night, but it could come too late to prevent further disruption in the commodity and financial markets.
Meanwhile, the U.S. market for natural gas remains chronically over-supplied with no real relief in sight. Although the NYMEX price per MMBtu has remained fairly stable during the first two months of the year, it is stable at a price that is far too low for many natural gas producers to remain profitable.
All of these factors now combine to create a precarious situation for heavily-leveraged companies as they head into debt re-determination season. Chesapeake Energy is a good example. When I wrote about that company’s long, difficult struggle to survive last November, Morgan Stanley had just lowered its price target for CHK stock from $2.25 per share to $1.25.
On Tuesday, CHK closed at $.4439 per share. That value destruction will create some very difficult conversations in the coming weeks in conversations with holders of the company’s debt. Many other mid-size to large independent producers now find themselves in a similar position.
But it isn’t only independent producers who are finding the current market conditions to be challenging: Even ExxonMobil, despite its prime position in the Permian Basin and major international discoveries over the past two years, is experiencing a disturbing rate of value destruction. As noted by Bloomberg, XOM stock dropped to a 15-year low on Monday and fell further on Tuesday, “just over a week before Chief Executive Officer Darren Woods is scheduled to present the oil explorer’s long-term strategic plan to investors and analysts.” For the year, XOM is now down by almost 25%.
The problem facing the domestic industry and its shale revolution of the last decade has always been its prospect of over-supplying the global market for crude oil and the domestic market for natural gas to the breaking point. The success of the OPEC+ arrangement has provided U.S. producers with a 3-year vacation from having to actually grapple with that issue.
But the elimination of the “fear premium” in oil prices related to frequent Middle East upheavals in recent years, along with the rude arrival of the Coronavirus’s impacts on markets have combined to hasten the end of that vacation, and many companies are completely unprepared to deal with the fallout.
Big, stable companies like ExxonMobil, who have major, diverse assets across the globe and full integration in their operations will be able to continue to survive and thrive despite the hits their market caps have taken in recent months. But companies that have bet everything on shale and become over-leveraged in the process are going to have a very difficult time in meeting their obligations.
As reported by the Financial Times on Monday, Bank of America noted that “US energy stocks are now underperforming those in the S&P 500 by the biggest margin since the Japanese attack on Pearl Harbor in December 1941.”
That is a troubling marker indeed, one that likely presages a year that will see another big shaking-out in the domestic U.S. oil and gas industry.
