Connect with us

Analysis

How the US shale industry needs to win back Wall Street

Published

on


In a White House race defined by the pandemic, the future of the US energy industry made a rare intrusion at the final presidential debate.

Democratic challenger Joe Biden’s suggestion that he would “transition away from the oil industry” was seized upon by President Donald Trump, who warned massive job losses would follow.

But for the US shale industry, whose pioneering technology and record-breaking production upended the global oil market over the past decade, job cuts are nothing new. With many operators financially stretched even before coronavirus crippled oil demand, bankruptcies are mounting and the employment picture deteriorating.

Hopes that America’s prized shale patch, one that stretches from Texas to Pennsylvania and up to North Dakota, would propel the US to energy independence appear increasingly forlorn. After years of stunning growth, domestic oil output is likely to fall this year by the biggest-ever annual margin on record.

“Christmas 2019 will forever be seen as the good old days of the US oil and gas industry,” said Adam Waterous, head of Waterous Energy Fund, a private equity firm that is now eschewing shale investments in favour of oil assets in Canada.

If an understandable gloom has descended on a sector now confronting a far less dazzling future, a consensus is emerging on its most urgent priorities. According to Daniel Yergin, vice-chairman of consultancy IHS Markit, repairing its relations with investors should top the list.

Line chart of crude production, million barrels per day showing US oil output is forecast to keep falling

The sector burnt through $400bn of outside capital between 2008 and 2018, according to consultancy Rystad Energy, while barely managing to turn a profit. Even for the best operators, the cost of capital is rising — a reflection of shale’s poor returns and an investor base beginning to turn its attention to renewable energy.

“Even before Covid, shale needed a second revolution,” said Mr Yergin, author of a recent book on energy, The New Map. “It needed a revolution in terms of its relationship with its investors.”

Some investors hope that if oil prices remain around $40 a barrel, where they have been in recent weeks, then a wave of consolidation among operators will deliver a far more efficient industry — and one more enticing to Wall Street.

The momentum behind M&A is building. In the past month, Devon Energy bought WPX Energy, ConocoPhillips pounced on Concho Resources, and Pioneer Natural Resources announced its plan to buy Parsley Energy.

Only the best oil-bearing shale rock will offer profits in a world of lower oil prices © EPA

The bulls also look back to the shale patch’s recovery in 2016, when it emerged from an earlier price crash leaner and fitter, able to increase production rapidly at much lower prices.

Muqsit Ashraf, head of Accenture’s global energy practice, points to factors that have gained in importance since the industry grappled with the last swoon in oil prices. Digitalisation now allows for better well design, placement of well bores and understanding of the subsurface, which could all yield 20 to 40 per cent efficiency gains, he said.

But operators say repeating the simple changes — like fracking for oil around the clock rather than only in daylight hours — that drove break-even prices down during the last crash, is not an option.

“There’s only 24 hours a day,” Matt Gallagher, chief executive of Parsley Energy, said in an interview with the Financial Times this summer. “It will be single-digit cost reduction percentages from here.”

Line chart of Number of rigs (oil and gas) showing The US rig count went into freefall as drilling actvity collapsed

With squeezing costs and driving efficiencies harder than it was, it is little surprise that the consolidation of the past month has centred on the premium acreage of the Permian Basin, the prolific shale field located in west Texas and south-eastern New Mexico. It is an acknowledgment that only the best oil-bearing shale rock will offer profits in a world of lower oil prices.

Companies are now focused on the “core of the core”, said Mr Ashraf — the very best acreage, where crude can be produced cheaply. Parts of the Permian, he said, could break even in the low $20s or $30s a barrel.

But that is beyond much of the industry, said Mr Waterous, who argues “you need a price north of $70 before you start achieving a cost of capital”.

Scott Sheffield, chief executive of Pioneer Natural Resources: ‘Most companies are below a $10bn market cap. And so most investors are not going to look at the small companies to invest in’ © F. Carter Smith/Bloomberg

There is little doubt that the executives driving the past month’s dealmaking have one eye on Wall Street. Scott Sheffield, chief executive of Pioneer Natural Resources, told the Financial Times that in an industry littered with dozens of independent operators, only four companies were now “investable” — his own, plus EOG Resources, ConocoPhillips and Hess.

“Most companies are below a $10bn market cap. And so most investors are not going to look at the small companies to invest in,” Mr Sheffield cautioned.

Occidental Petroleum, which last year borrowed more than $50bn to buy Anadarko in a deal widely decried as among the worst ever bets in a shale patch that has not been short of them, did not make his list.

Few believe consolidation can stop here. But more bankruptcies might precede it, warns Chris Duncan, a director at Brandes Investment Partners, an advisory firm.

Column chart of Chapter 11 filings (cumulative) showing Bankruptcy numbers have accelerated

Thanks to a borrowing binge during the boom years and the more recent crash in the sector’s valuation, more than half of the industry’s operators now carry debts equal to or greater than their market capitalisation, said Mr Brandes.

Rystad Energy estimates that North American oil and gas sector debt this year had already hit an all-time high and could reach $100bn before the year is out — far more than in 2016, after the last price crash. As many as 55 E&P companies would go bust this year, it predicted.

That is a prospect that will deepen the sector’s pain, as unsecured debts are left to reverberate down a list of creditors that includes service providers and midstream companies.

“I don’t think it’s a matter of if more consolidation happens,” adds Mr Duncan. “It’s just how it happens and how fast.”

For Mr Ashraf, one consequence of the consolidation will be that the top 10 oil producers will provide as much as half the shale industry’s total capex in the next five years, up from less than 30 per cent during the past decade. The biggest beasts, including Chevron and ExxonMobil, will impose economies of scale concentrated on the Permian.

Twice weekly newsletter

Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.

If the industry’s future will be smaller and concentrated in fewer hands, most believe the halcyon days of giddy growth in production are also behind it. US oil output more than doubled between 2010 and 2019, hitting a record high near 13m b/d before the pandemic struck.

Mr Sheffield puts American oil production growth at 2 per cent a year over the next decade. Ryan Lance, chief executive of ConocoPhillips, told the FT that the collapse in capital investment could leave production next year 4m barrels a day below its recent historic peak.

“Shale shook the world’s oil market not just because the total volume was so large but because the annual growth rate was so rapid,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy. “But those days are over.” 



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Analysis

DUP’s new leader strives to stabilise N Ireland’s biggest party

Published

on

By


Sir Jeffrey Donaldson, new leader of Northern Ireland’s Democratic Unionist party, is striving to heal DUP wounds that pose a very potent threat to its status as the region’s most powerful political force.

The 58-year-old is expected to ease internal divisions by sharing the DUP’s prized ministerial positions in Northern Ireland’s government between his supporters and those of Edwin Poots, his predecessor as party leader, who was ousted last week after just 21 days in the job.

Donaldson, named DUP leader on Tuesday, is also aiming to unite the party around the cause of aggressively pressing the UK government to overhaul contentious post-Brexit trading rules between Great Britain and Northern Ireland.

These arrangements were strongly criticised but ultimately tolerated by Poots and by Arlene Foster, Northern Ireland’s former first minister. Her removal as DUP leader in April heralded what has been the most tumultuous period in the party’s 50-year history. 

The urgency of forging consensus within the DUP stems from a big decision facing Donaldson: whether to endorse a first minister appointed by Poots against the party’s will, propose a replacement, or collapse Northern Ireland’s government in protest at post-Brexit trading rules.

A collapse would have far-reaching consequences beyond the DUP: the power-sharing government at Stormont established under the 1998 Good Friday Agreement drew a line under the sectarian violence in Northern Ireland that claimed more than 3,600 lives.

Shuttering the Stormont assembly could destabilise the region in the early stages of the summer marching season, which often inflames tensions between Northern Ireland’s Catholic nationalist community and Protestant unionists.

“We need Stormont established for people to see that politics is working and it’s not always in a perpetual crisis,” said Peter Sheridan, chief executive of Co-operation Ireland, a peace-building organisation. “Wherever you have a political vacuum there is always the danger of violence.”

Whatever happens in the next few weeks, Donaldson, a senior DUP MP at Westminster, knows that at the very least he is counting down to Stormont assembly elections scheduled for May. He intends to stand in them, and then become first minister, he told the Financial Times.

But the elections will be a public test that the DUP is ill-equipped to face in its current state of disarray. One recent opinion poll put its support among voters as low as 16 per cent, compared to more than 35 per cent in the early days of Foster’s leadership.

“The DUP machine . . . is completely unfit for an election compared to how primed they usually are,” said Sophie Whiting, co-author of an award-winning book about the DUP. 

DUP founder Ian Paisley addresses a meeting in Belfast in 1972 © Bride Lane Library/Popperfoto/Getty Images

Established as a hardline breakaway from the Ulster Unionist party, the DUP was for decades synonymous with its founder, the late Rev Ian Paisley. He set up his own Free Presbyterian church and was famed for quotes like “save Ulster from sodomy” in his effort to prevent the decriminalisation of homosexuality in the late 1970s.

Diarmaid Ferriter, an Irish historian, said some of what has played out in the DUP since Paisley stepped down as leader in 2008 was typical of the “infighting after a very dominant authoritarian figure departs the stage”.

Neither of the DUP’s subsequent two leaders — Peter Robinson or Foster — had the charisma of Paisley, and internal party divisions became more pronounced.

But the fallout from the UK’s departure from the EU has also played a central role in the DUP ructions. The pro-Brexit party briefly enjoyed major influence at Westminster when it propped up Theresa May’s minority UK government, and the DUP rejected her withdrawal agreement with the EU.

But when Boris Johnson replaced May as UK prime minister, the DUP accused him of betrayal after he finalised a Brexit deal that created a customs and regulatory border between Great Britain and Northern Ireland. Treating their region differently to the rest of the UK was anathema to Northern Ireland’s unionists.

“It’s very hard for [the DUP] to explain what happened,” said Alex Kane, a longtime Northern Ireland commentator.

Unionist protesters demonstrate against the Northern Ireland protocol of the Brexit agreement in Portadown © Clodagh Kilcoyne/Reuters

The DUP has also been coming under threat from the winds of change in the region. Young people, and their parents and grandparents, have begun to embrace gay rights, abortion and other issues that clashed with the DUP’s deep conservatism.

Dissatisfaction with Foster inside the DUP included a perceived softening of her stance on social issues after she failed to vote against legislation banning gay conversion therapy.

But the biggest issue for Foster was the DUP’s handling of the Northern Ireland protocol — the part of Johnson’s Brexit deal that introduced the border in the Irish Sea.

Tim Cairns, a former DUP adviser, said the criticism of Foster “wasn’t that she was too soft on the protocol, it was that she was too soft in the action she was taking to get rid of the protocol”.

Poots succeeded Foster with promises to do better on the DUP’s most important issues, and to embrace a more inclusive leadership style.

He failed at both, notably by agreeing to continue the power-sharing government involving the DUP and the nationalist Sinn Féin party on terms overwhelmingly opposed by his colleagues at Stormont and Westminster.

Poots infuriated DUP politicians by striking an agreement under which Westminster will pass legislation to protect and promote the status of the Irish language — a top priority for Sinn Féin.

Abortion rights protest at Stormont © Charles McQuillan/Getty Images

Donaldson on Monday launched his bid to lead the DUP with a warning that the government at Stormont could collapse if the UK did not take “decisive action” on the Northern Ireland protocol.

A UK government official said Donaldson was seen as a “more pragmatic” figure than Poots, adding that the new DUP leader’s experience at Westminster meant he had “relationships with people” that could ease negotiations on the protocol.

Still, securing changes to the protocol will be difficult, not least because any revisions must be agreed with the EU. The British official rejected the suggestion that the UK government would have to give the DUP a sweetener on the protocol to ensure Northern Ireland’s stability.

Kane said he believed Donaldson would do everything possible to avoid a collapse of the region’s government. “He isn’t giving up Westminster and coming back to Northern Ireland just to allow the assembly to come down,” added Kane. “He wants to be first minister.”

As for the future of the DUP, while the party has been scarred by recent events, Donaldson arguably inherits a better situation than his predecessor.

In particular, Poots resolved the contentious Irish language legislation, relieving Donaldson of an issue that was always going to be problematic for some inside the DUP.

Furthermore, Donaldson is privately more progressive on social issues than he is in public, and a strategic long-term thinker, according to people who know him.

Cairns said: “There are certainly problems within the party, [but] if anybody is going to sort that out I think Jeffrey is probably best placed to do that.”



Source link

Continue Reading

Analysis

Conservatives’ ideological splits exposed by big spending rail projects

Published

on

By


Boris Johnson has been urged by Conservative MPs representing the ‘red wall’ of former Labour heartland seats not to cut back major rail infrastructure projects as the UK prime minister comes under pressure from chancellor Rishi Sunak to rein in ambitious plans for public spending.

The National Infrastructure Commission, which advises the government, recently said plans to extend the High Speed 2 rail project to Leeds should be scrapped to save £32bn from its expected budget of over £100bn. Earlier this week the FT revealed that costs on HS2 have risen by £1.7bn in the past year — partly because of the pandemic — although this was covered by the project’s contingency budget.

Meanwhile the Treasury has not yet given the sign-off to the Northern Powerhouse rail project, which is supposed to link the north’s big cities from Liverpool, Hull and Newcastle via Manchester, Sheffield and Leeds, and which could cost a further £39bn.

The uncertainty over the multibillion pound transport schemes underline the tensions between Johnson and Sunak in recent weeks over a number of spending projects, with the Treasury eager to dampen Downing Street’s appetite for spending. Number 10 has clashed with other Whitehall ministries over social care reform and a new “royal yacht”.

Johnson is seen by his party as the most pro-spending Conservative leader since Harold Macmillan’s time in Downing Street from 1957 to 1963. Since Margaret Thatcher took over the party in 1975, it has shunned stimulating demand through spending, opting instead for tax cuts.

One senior Treasury insider said that Sunak’s view was “there are choices that have to be made” and it was important to stabilise the public finances as the UK emerged from the worst of the coronavirus pandemic. The chancellor announced two tax changes in his March budget — freezes in the personal income tax threshold and a rise in corporation tax.

“What he did at the Budget was to put us back on to a more stable trajectory, get debt falling and get our public finances on to a stable footing. He made it very clear that the two tax changes are things he wanted to do to achieve that. But he’s not necessarily keen on raising any more taxes on people, particularly personal taxation,” the official said.

HS2 is designed to run from London to Manchester via Birmingham and Crewe. But the “eastern leg of HS2 2b” — extending from the West Midlands to Leeds — has been criticised by many Tory MPs in its traditional southern strongholds, who believe it should be scrapped.

Tories elected for the first time in the 2019 election have privately warned that it would be a mistake to cancel it. “Our first time voters are watching and waiting for the government to prove they’re delivering on the promises we made them in 2019,” one newly elected MP said.

Other Tories insist the Northern Powerhouse Rail, sometimes referred to as HS3, is even more important. “It’s absolutely crucial that ‘Northern Powerhouse Rail’ is built. I wasn’t a big fan of HS2 but this is exactly what we have to build to deliver on the trust that was put on us,” another MP said.

Following a report carried by the Huffington Post on Tuesday that said the Treasury and Downing Street were at odds over when to publish the long-awaited integrated rail plan (IRP), which will set out the details of Britain’s future rail system including the new Leeds-Manchester route, a Downing Street spokesman said the government was “still committed” to the new rail line.

“We are getting on top of our priorities and investing in northern transport,” he said. “The integrated rail plan will set out how major rail projects including HS2 phase 2b and Northern Powerhouse Rail will work together to deliver reliable rail services that passengers deserve.”

One Treasury figure said that Downing Street, the Treasury and the Department for Transport all broadly accepted the need to push ahead with the project — but the details were still up in the air.

“There needs to be a package of investment and needs to be agreement on what that looks like. Work is ongoing,” the person said. “But this is more an issue of bandwidth than any serious differences, it has been a while since the relevant cabinet ministers all met.”

Any disagreements on funding the new railway line are not about scale but are instead likely to be about the timeline and how soon spades can go in the ground. 

Many newly elected Tory MPs favour more spending, to make up for decades of under investment in their areas. One MP representing a northern constituency said that most of the newly elected Tories backed “sensible measures that allow us to deliver on our manifesto commitments”.

“Very few people are going around saying we have to do everything, colleagues know that we need to have clear blue water with Labour. We’re in a dangerous position if it looks like we’re going to outspend them,” they said.

Paul Goodman, editor of the ConservativeHome website and a former Tory MP, said the current parliamentary party has a similar tension to the one at the top of government. “Their hearts are with Johnson but their heads are with Sunak,” he said.

“Most Tories are in parliament because they are Conservatives and that’s true of the red wall intake too. They believe in a smaller state and lower taxes. But these beliefs run up against their constituencies demanding more and more spending.”



Source link

Continue Reading

Analysis

First unleveraged single-stock ETPs aim to woo retail investors

Published

on

By


Interested in ETFs?

Visit our ETF Hub for investor news and education, market updates and analysis and easy-to-use tools to help you select the right ETFs.

Leverage Shares is attempting to tap the boom in retail investing with the launch of the world’s first unleveraged physically backed single-stock exchange traded products. The ETPs provide investors in UK and elsewhere in Europe the rare opportunity to buy fractional shares.

Investors might be forgiven for thinking they are another version of the company’s leveraged or inverse ETPs that amplify gains and losses, reset every day and are generally viewed as unsuitable for retail investors.

However, the products promise no geared returns. Instead, they invest directly in the underlying company and, with their launch at $5 per share, their additional sterling and euro share classes, and their offer of big-name companies such as Tesla, they are being aimed straight at the European retail market.

Oktay Kavrak, product strategist at Leverage Shares, said it was unsurprising that the new products were not well understood at present. “Since we’ve only been making leveraged ETPs until now, I’d say this is expected,” he said.

But they have caught the attention of some industry participants.

Matt Brennan, head of passive portfolios at AJ Bell, one of the UK’s largest investment platforms, said that while no decision had yet been taken to add the products to the platform, AJ Bell was “actively monitoring them”.

“In general I am not usually a fan of ETPs, as they do add extra complexity, but to be fair to these products, they do seem to solve a few different problems,” Brennan said.

The products, which it started to roll out in May, effectively made it possible for UK and some other European investors to buy fractional shares in large overseas companies such as Tesla, Google and Amazon for about $5. That compares to about $600 for a single share in Tesla, $2,500 for Alphabet and nearly $3,500 for Amazon.

Leverage Shares’ latest launches last week added large Chinese companies such as Nio and JD.com to the family of unlevered single stock ETPs, which are listed on the London Stock Exchange, Euronext Amsterdam and Euronext Paris.

Kavrak said the ETPs were already available on the Interactive Brokers and Swissquote platforms and that Leverage Shares was in negotiation with other platforms including AJ Bell and Hargreaves Lansdown.

“I can understand the rationale for an unlevered approach to accessing single stocks that acts as a proxy fractional share — though clearly investors will need to pay an ongoing charge for the privilege — something they don’t need to do when owning the standard equity share,” said James McManus, chief investment officer at Nutmeg, a UK investment platform that offers low-cost investment portfolios.

“Clearly this is also an imperfect solution to an existing problem and points to the fact that many platforms have not solved the issue of fractional shares — unlike their US counterparts,” McManus added.

So-called fractional shares allow retail investors to own a part of a share, which can be useful if the share is expensive or if large share price movements result in the need for portfolio rebalancing. Nutmeg has developed a fractional share facility that it uses for its portfolio offerings.

Brennan pointed out that as well as enabling fractional shares the currency share classes eradicated the need for currency conversion charges, which could be high on some platforms.

Investing in the US companies via the Dublin-listed ETPs would also relieve investors of the need to fill in documentation to avoid penal tax rates, Brennan said, although he warned that potential investors should also remember that the European-listed ETPs often trade when the markets on which their underlying stocks are listed are closed.

He also pointed to the potential burden of costs that the ETPs would bring. These included the annual management fee of 0.15 per cent, but also the likelihood of wider bid-ask spreads than a more diversified ETF. He added that the ETPs might not track the underlying stock very efficiently if cash was not fully invested and dividends were not reinvested.

However, Todd Rosenbluth, head of ETF and mutual fund research at CFRA said the products looked interesting and were relatively inexpensive for what they offered.

“I think a 0.15 per cent fee for the stock trackers is modest, given the access these provide, and we would expect trading costs will likely improve as more investors discover them. Most new exchange traded products incur limited volume initially,” he said.

He said they should not be confused with Leverage Shares’ other offerings. “There are leveraged versions, but the ones we’re talking about are as risky as owning Tesla or Amazon outright.”

Click here to visit the ETF Hub



Source link

Continue Reading

Trending