Analysts predict energy companies have challenges to solve after this year's collapse of commodity markets
The next 18 months could be make or break time for the nation’s energy industry, two analysts’ outlines indicate.
Deloitte, which issued a Midyear 2020 report this month, prefaced its outlook by stating, “2020 poses one of the greatest challenges to oil and gas companies since Col. Edwin Drake struck oil in Titusville, Pennsylvania in 1859.”
Enverus, an on-demand software and data analytics company that follows the oil and gas industry, meanwhile, summed up its current energy industry outlook by simply stating this: “Don’t call it a comeback.”
Both reports come out this month while the nation’s energy industry continues to deal with a massive hangover caused by the Coronavirus pandemic and market manipulation by Russia and members of the Organization of Petroleum Exporting Countries (OPEC+).
Subsequent production cuts by OPEC+ and a rebound in demand for motor vehicle fuels have helped stabilize oil prices near $40 a barrel the past 60 days.
However, both Deloitte and Enverus warn the situation is by no means settled.
The first half of 2020 has proven challenging for the oil and gas industry, it observed, adding that the second half of the year could be nearly as difficult to navigate.
The report, which can be found at deloitte.com, noted energy companies continue to be faced with challenges that need to be tackled when it comes to finding a new normal in these unprecedented times, including low prices and uncertain demand growth.
Current conditions, it stated, could require many companies to permanently lower costs by restructuring activities that discharge debt.
However, it also recommends that companies retain their abilities to either ramp up or down operations to match changing external conditions. Streamlined asset portfolios could improve their operational flexibilities, the report observed.
While Deloitte’s report also predicts that natural gas pricing will remain at a lower level for a longer period of time than what analysts had recently anticipated, it predicted that the market will provide enough support that some gas producers in the Marcellus and Haynesville Shale could see revenues rise, allowing for some consolidations to occur through mergers and acquisitions.
As for liquefied natural gas exporters, Deloitte recommends that they maintain their capabilities to get the fuel to international customers that may need the fuel in the latter half of the decade.
Duane Dickson, the vice chairman and principal in Deloitte Consulting’s Energy, Resources & Industrials industry group, said companies are going through “a great compression.”
“One of the big questions is whether we are in a demand rebound or demand reset mode,” he said. “Can the world keep some semblance of an economy going? And are we going to see a new normal for oil prices, and will we have a different break even for production, going forward?”
Dickson said the COVID-19 issue has created a much more significant spotlight on supply chains, adding that oversupplies of commodities are being observed in most geographical areas.
“This could be the final straw for a lot of U.S. independent shale operators,” he said.
Enverus stated in its report at enverus.com that it is cautiously optimistic about where it sees the nation’s energy industry headed.
While more than half of the world’s population was in lockdown in April, it estimated the lockdown rate had fallen closer to 25% this month, based upon traffic congestion indicators in major urban centers around the world.
Enverus stated higher traffic counts also are related to increased economic activities that are key drivers of global oil demand.
Enverus said it expects to see natural gas prices rebound to more than $3.50 per million British thermal units this winter.
It noted the crude market continues to rebalance itself and expects inventory draws will be needed between now and mid-2021, though it observed its recovery remains difficult to predict because of anemic refining margins and the recent rise in new COVID-19 cases.
Companies that entered the pandemic burdened with debt issues likely could fail, while others with cash are in a position to pick up quality assets at bargain prices.
“While it feels like a lot of chaos when you are outside looking in, the market actually is working,” said Bernadette Johnson, Enverus’ vice president of strategy and analytics.
As energy companies begin to report second quarter results later this month, Enverus stated it and all analysts will closely be watching curtailments, activity, costs, and liquidity.
“We’re cautiously optimistic, but not ready to label this a comeback,” she continued. “We anticipate some operators to carry that same theme, too. A lot of the pain should be behind them now. Capex has been cut, costs were lowered in both development and production, and hedges provided parachutes. Demand is on the uptick — for now at least.”