At the bottom of the energy cycle we know that low oil prices put companies in a rut, which lead to cuts in investment, which eventually reduced production, which then evaporated oil gluts. That process may accelerate with a little help from our friends in OPEC.
Oil prices are bouncing back as progress seems to being made in getting non-OPEC nations to participate in OPEC production cuts. Both Russia and Oman have committed to their share of a cut and they are working with smaller producers to help them participate, if even a small way. Russia even has said that they would accept some natural decline rate from some participants as part of the cut and that should help make it easier for some countries to join a deal. It also puts pressure on other producers that don’t want to look like they were the country that killed the OPEC deal that has raised the hopes of energy producers across the globe.
Prospects of an OPEC production cut is getting some oil companies and investors excited even as we know some oil companies are still in the Cap X reduction mode at a time when investors are starting to get bullish on energy. ConocoPhillips (NYSE:COP) had again cut CapX on high cost projects in part to keep its dividend printing machine rolling. Yet that does not mean energy deals are not going to heat up. It is going to see some leaps and pull packs.
Today’s Financial Times for example has a headline that says, “Bond investors hand Opec a vote of confidence as relief looms for corporate borrowers as Opec supply cut boosts investors’ mood." The FT says that, "the worst may soon be over for corporate borrowers from the battered US energy industry, per S&P Global, as a flurry of debt sales suggests investors are confident the Opec supply cut will help put a floor under the oil price. While defaults of energy groups will continue into 2017, analysts with the credit rating agency say they are likely to level out next year and that stresses on the energy sector will “eventually subside”.
The FT cites deals from Chesapeake Energy (NYSE:CHK), "the indebted US energy group and a pioneer of the shale industry, selling debt for the first time in two years.” With success and five energy deals that were completed on Tuesday — including offerings from Mexico national oil group Pemex, Parsley Energy (NYSE:PE), Rowan Companies (NYSE:RDC) and Matador Resources (NYSE:MTDR) — marked the most since seven energy companies tapped markets on the same day in December 1993. Together the sales have firmly pushed the sector’s debt issuance above 2015’s pace, which was the slowest year since 2010, per Dealogic.
Glencore (LON:GLEN) also cut a major deal buying part of Russian Rosneft (MCX:ROSN) in a deal backed by Vladimir Putin. Putin has also sent a message to Russian oil companies that they are all going to cut production like it or not. I wonder if he has the same type of sway with other non-OPEC producers. Reuters says that some companies are turning to Chapter 11 creditor protection to shed debt and raise cash so they can spend and invest again. Add to that the hope that Donald Trump will allow producers to compete is fueling optimism and investment.
We continue to believe that the run in oil is not done. Despite skepticism about the OPEC deal, we believe it is as good as done. We should see the market rally to congratulate the announcement.
Natural Gas took pause on the hope that the Arctic blast will be a short one. Still today the EIA injection, if we come in below expectations, should drive natural gas to a new high! Buy breaks!