Headlines
Oil Price Comment: Despite the rising oil price outlook, the fact that the US is likely to now become the global swing producer, means that we do not see the wider benefits accruing from a strengthening oil price outlook in the wider sector, flowing fully through to European oil and gas segment. For that to be achieved, more needs to be done by European host governments from the levels already seen, to address the burdens and barriers placed on and in front of producers, to making progress in appropriate timescales. We see the North Sea, specifically Norway with its ultra-high tax burdens, and the nascent UK shale industry as the main victims to this new world order.
In Brief:
Gulf Keystone Petroleum (LON:GKP – 6p) – Shaikan Payment
President Energy (LON:PPC – 7p) – Operations Update Positive, But it is Still Argentina
Northern Petroleum (LON:NOP – 2.63p) – Got Through It
Oil Price Comment
The futures have been demonstrating a firm belief that the oil markets will continue to see a positive progression in the oil price (up to ~$56/bbl in March 2023), a fact which has been supported further by the continued gains in the spot price (~$42/bbl) this week. While the number of US onshore rigs has continued to decline, we have a growing belief that the rapidity at the US rig market’s ability to commission and stack rigs, allied with Saudi Arabia’s announced its intention to abandon its traditional role as swing producer and maintain market share will mean that whether willingly, or via market forces, the US will now become the defacto swing producer.
To some extent, we believe that this has already happened, and that the US market is already subtlety adapting to its swing producer role, and once that is established in the psyche of the operator base, we have no doubt at all that the application of free market economics will result in a very lean very efficient and agile onshore oil market.
This will be accelerated by the inevitable period of destruction as banks that have perfected their security packages see life in the A&D market and assert their right to recover on the defaulted debt. While this is a short term negative, in the longer term it will become a positive as a leaner more aggressive operating base seek to generate returns from the assets that they have just acquired.
While Iran and the rest of OPEC are in disarray, there is significant impetus behind raising production from current levels, and as such, in the near term, until this has been quantified, there is unlikely to be too much pressure to bring the US rigs back on line, and the decline in US production will therefore accelerate, it will further cement the US’ role as the swing producer.
Net/net, we do not see the oil price remaining at these levels over the longer term as the impact for forward production attrition makes greater impact on production. We believe that $75 – 80/bbl is the real mid cycle price, and that unless the investment in upstream starts in the next 2 years, that we will see the super-cycle return in the shape of ~$150/bbl oil prices.
Despite the rising oil price outlook, the fact that the US is likely to now become the global swing producer, means that we do not see the wider benefits accruing from a strengthening oil price outlook in the wider sector, flowing fully through to European oil and gas segment. For that to be achieved, more needs to be done by European host governments from the levels already seen, to address the burdens and barriers placed on and in front of producers, to making progress in appropriate timescales. We see the North Sea, specifically Norway with its ultra-high tax burdens, and the nascent UK shale industry as the main victims to this new world order.
In Brief
Gulf Keystone Petroleum (LON:GKP – 6p) – Shaikan Payment: While every payment to the Company over and above that which is made for the oil revenues is a release of pressure, especially given its debt pile, they are currently not enough to "move the needle," and as such say more the for KRG than the Company’s fortunes. To that extent they are symbolic of three things: (i) the KRG's resilience in the face of Daesh; (ii) a benchmark against which the scale and extent of Baghdad's intransigence at accepting the stupidity at the heart of their approach to international oil markets can be measured; and (iii) how governments and oil companies can work together to achieve a common goal. We think today's news says a lot more positive things for the KRG than it does for the Company, but that is not to take away the positive impact this has on the Company.
President Energy (LON:PPC – 7p) – Operations Update Positive, But it is Still Argentina: News of today's update, while not company making, is illustrative of the approach that it is taking to keep a strict control on costs while seeking to maintain forward momentum in growing the business. While we can't avoid the prospectivity and potential of the subsurface, we are not enamoured by the Argentine regulatory environment, and while the Marci government has made great strides away from the utter disaster that was Kirchner, we are still not convinced that this is yet a new leaf.
Northern Petroleum (LON:NOP – 2.63p) – Got Through It: While the results are not pretty, they weren't expected to be, and that only reflects what's past. For us, the only important number is the cash balance and in this instance, the outlook. With a cash balance of $2.4mm ($1.6mm net of receivables and payables), the outlook is the more positive. To us, all the positive take always from the year to 2015 have been brought to fruition post the year end, with production rising and the outlook lifting. What the Company can say with confidence is that they have got through what has been a difficult period and now, with careful management of the next few years, the current platform should be a springboard for future successes.