Pollyanna Speaks

Nothing to fear

Nothing to see here… Remember, just keep pumping!

Well, I was casting about a bit on what to talk about this week… Not for lack of material, but mainly because I did not want to go on a rant about the same things my few readers have pored over before. Unfortunately for you intrepid souls who have found your way here, experts in the region keep talking about the same things – so I guess I will have to also.

As I mentioned indirectly last week, there was a pretty big shindig in Midland this week… the Executive Oil Conference. I read, and disagreed with, much of the talk coming out of that meeting. Honestly, it seemed like a lot of nervous people cautiously trying to assure each other that it was going to be okay.

Then, I stumbled across this little gem, which quotes Dave Pursell, the managing director and head of securities at Tudor, Pickering and Holt, who said, “I’m here to tell you why oil can and will be $80 in the second half of 2016.” As is probably needless to say at this point, I am slightly more bearish on oil pricing next year. For example, oil is now off something a little over 60% from the highs of seventeen months ago. In order for Mr. Pursell’s projections to be true, the price of oil will need to double in the next twelve months. Once again, as I have said before, this Pollyannaism is only going to protract the downturn on the oil shale industry by allowing some of the marginal producers to hang around a little longer.

Perhaps I should make a better case for why I think that oil prices are going to stay lower for longer. I need look no further than the very same Executive Oil Conference where Mr. Pursell spoke, so that is convenient! For example, Joey Hall, the executive vice-president of Pioneer Natural Resources’ Permian operation, stated that they have acquired an additional 128,000 acres and intend to pump more oil next year than they did this year. They have engaged “additional end markets” whatever that means, that apparently provides a $20/bbl premium over the market rate on the oil they pump out of these newly acquired lands. (I think what we’re actually talking about is that they have been able to find someone to hedge their production – Pioneer loves the three-way collar, after all, but no matter… the result is the same.)

Confirmation that the “end markets” strategy is actually business-speak for accessing derivatives markets is confirmed by this article. In this article Scott Sheffield argues that Pioneer is on good footing because it hedged 90% of its production this year, and will have 85% of its production hedged next year. In 2017, meanwhile, Pioneer only has 20% of its production hedged… but that is okay because “Sheffield predicted the market would rebound by then.” Why will it rebound? Because it has to, or Pioneer is going to be in a LOT of trouble.

Concho Resources, meanwhile, stated that it has decided to be more conservative over the next year. Of course, Will Giraud, an executive vice-president and denizen of the C-suite of offices also mentioned immediately after that they have completed over 30 horizontal wells this quarter, and expect to see their production increase next year through increased efficiencies.

Mr. Pursell, argues that the reason the price will fall is because the shale production in the U.S. is declining. The latter part of this statement is undeniably true. Between the U.S. and OPEC, the total production of barrels per day has fallen by approximately 1/2 million bpd. Yet, it has fallen by this amount in a period when Libya (once a producer of 2 million bpd) and Iran (a potential producer of up to 4 million bpd) have been out of action. Additionally, while 500,000 barrels a day sounds like a lot – and it is – the market is presently being oversupplied by something on the order of 1-2 million barrels per day! Now, as a math expert I make a pretty good lawyer, but I think that taking 0.5 away from 1 still leaves you with a surplus. A surplus in a supply of commodities provides pricing pressure… can we all agree? Can anyone explain to me how continuing to have a glut of oil in the market is going to sustain a rocket-like recovery of oil prices into the $80/bbl range?

Lest you think that your lowly blogger is the only person sounding the alarm over these factors, you can also look to David Einhorn, the famous hedge fund magnate who runs Greenlight Capital, who criticizes the above companies as “motherfrackers” that could not live within their existing cash flows when the price of oil was $100+. Tim Dove, COO of Pioneer seems to agree with my assessment above as well, when he said that, “If (Pioneer has) a lousy commodity price market”, they will have to adjust their growth expectations – meaning of course, that it will be a disaster if their hedges run out and the price of oil remains low thereafter (as I have argued ad nauseum here before).

To continue tooting my own horn, we recently received further confirmation regarding the underlying weakness of the regional economic environment in West Texas. As “long-time” readers of this blog will know, I eschew complex indices for simpler economic measures when it is both possible and effective. For that reason, I have argued before that the Midland-Odessa Regional Economic Index is not a very good indicator of the “boots on the ground” view of what is going on in West Texas right now. My prior argument was the sales tax receipts showed that the economic environment was weaker than projected in the index. Confirmation came in this article, in which Karr Ingham, purveyor of the MREI stated that he was surprised by the weaker than expected jobs data coming from the region. He now estimates that Odessa has lost over 5,500 positions to go along with the almost 6,000 positions lost since last December and Midland has lost a relatively similar number.

Now, for those of you who come from more populated climes than our own, losing something on the order of 12,000 jobs may sound large, but not devastating. When you realize that the statistical area for this region only contains 278,000 people, however, this number becomes quite a bit more troubling. That figure, by itself, indicates that true unemployment over the last year has spiked by 4.3%… I’ll say that figure again 4.3%. When one figures that the unemployment was already a low 3+% you can see that the true unemployment in the region is now on the order of 7.5%. This is bad, mmm-kay? Yet, this determinate cannot be taken in isolation either. The unemployment figures, if they were to be truly sussed out, would have to contemplate the support positions that have been lost over this period, as well. Even though there are an order of magnitude greater positions required to support the oilfield industry than are actually in the oilfield, let us just say for the sake of argument that only half the numbers of jobs lost in the oilfield have been felt in support industries. If that is true, then we must add another 2.15 percent to the 7.5% figure we’ve already tallied. This means that actual unemployment is really something more like 9.7%. This is close to the peak of the Great Recession era figures – and we haven’t even gotten to independent contractors yet!

In summary, things in the region are worse than anyone “in the know” wishes to credit so far. The oil companies continue to press on with ramping up production, in spite of obvious signs that the supply glut will continue. Meanwhile, the unemployment rate is still being under-calculated by economists because their index fails to capture available data that provides a more accurate snapshot.

All of this will be remedied by 2017, though, because the oil fairy is coming and will double the price by the end of next year, even though we can expect more than 0 barrels to come from Libya and Iran!

Get your waders on folks, the muck being spewed out here is getting deep.

Look… I want to bright and cheery; I really do. I am, at my heart, a true optimist – but that optimism is tempered by a sense of realism. Until the market leaders out here start to have serious discussions about what is happening, things are bound to get worse before they get better.

Hopefully we will find ourselves a happier topic in the very near future.

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3 Responses to Pollyanna Speaks

  1. Pingback: More Validation! | The Wolf Camp

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  3. Pingback: What if War is the Point? Part 1: On Growth | The Wolf Camp

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