Estimating The Impact of Different Oil Price Scenarios O

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Estimating The Impact Of Different Oil Price

Scenarios On Large U.S. Independents
Crude oil prices have been

extremely volatile of late. After
falling sharply by more than
60% in a short period of
slightly over six months, oil
prices have risen by over 40%
from their lows over the past
few months. In hindsight, the
sharp decline in oil prices
makes sense because of
slowing demand growth and
surging tight oil production in
the U.S., but the billion dollar
question is, what will they do
next, and how would that
impact the valuation of oil
companies. We currently
expect oil prices (Brent) to
average around $75 per barrel
for this year, below the global
marginal cost of production
due to the current oversupply
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1 of 11 31/03/2017 15:51
scenario, and increase

gradually towards the $85 per
barrel mark over the next two
years, as the supply becomes
tighter due to the recent
cutbacks in capital spending by
almost all major oil companies
and the growth in demand
picks up to more normalized
levels.
But there could be a much

sharper, V-shaped recovery in
global oil prices if the growth
in demand for oil products
picks up significantly on the
back of lower oil prices and
simultaneously, tight oil
production in the U.S. declines
because of a sharp, sustained
slowdown in drilling activity.
However, we believe that oil
prices cannot sustain above the
$100 per barrel mark for long
under normal geopolitical
conditions, unless the
Organization of Petroleum
Exporting Countries decides to
sacrifice some of its market
share for better prices. This is
because oil production in the
U.S. can quickly start growing
again at an annual rate of
around 1 million barrels per
day if oil prices sustain above
the $100 mark, and that would
once again create an
oversupply scenario, which will
weigh on benchmark oil prices.
But if for some reason there is
a change in the OPEC's stance
2 of 11 31/03/2017 15:51
and it takes some of its oil off

of the market, that would
provide a significant boost to
oil prices and large
independent oil and gas
players in the U.S. like
ConocoPhillips, EOG
Resources, Anadarko
Petroleum, and Chesapeake
Energy would gain significantly
from that.
On the other hand, if the OPEC

maintains its current stance
and the growth in demand for
crude oil does not pick up
because of a continued
slowdown in economic activity
in China - the world's second
largest oil consuming nation
and the key driver of demand
growth over the past few years
- or because of a rapid increase
in the penetration of
alternative fuels due to
advancements in biofuels or
fuel cell technologies, the
recent decline in oil prices
could sustain for a much longer
period. In addition, the
expected service cost deflation,
which would reduce the
average cost structure of the oil
industry, could also result in a
more robust non-OPEC supply
growth despite the slump in oil
prices. If this comes true and
the demand growth remains
weak, oil companies could be
in for a prolonged period of
depressed commodity prices,
3 of 11 31/03/2017 15:51
at least until the U.S. shale oil

boom subsides. The chart
below reflects our assumptions
regarding how these two
extreme oil price scenarios
could impact Anadarko's
average crude oil and
condensates price realization.
We have developed similar
potential scenarios for all four
of the U.S.-based independent
oil and gas production
companies we cover.
See our detailed analysis

of the potential impact of
these scenarios on
ConocoPhillips | EOG
Resources | Anadarko
Petroleum | Chesapeake
Energy
Impact On Profitability
Apart from average price

realization for crude oil and
natural gas liquids, global
benchmark crude oil prices
also impact the profitability of
an oil company's exploration
4 of 11 31/03/2017 15:51
and production operations.

However, the magnitude of the
impact largely depends on the
company's sales volume mix.
As in, what percentage of its
total hydrocarbon sales volume
is comprised of liquids (crude
oil and natural gas liquids),
versus dry natural gas. This is
because in some markets,
especially in the U.S., natural
gas prices are decoupled from
crude oil prices and depend on
the local demand-supply
dynamics. Of the large U.S.
independent exploration and
production companies we
cover, EOG Resources has the
highest liquids volume
percentage, while Chesapeake
Energy has the highest dry
natural gas volume percentage.
Therefore, EOG Resources’
revenue and cash operating
margins are more sensitive to
the variation in global crude oil
prices than Chesapeake
Energy. The chart below
summarizes our estimates for
all of the four company’s 2015
upstream profitability under
various crude oil price
scenarios.
Capex and Growth Impact

5 of 11 31/03/2017 15:51
In addition to average price

realization and profitability,
crude oil prices also impact an
oil company's capital
expenditure and growth plans.
This is because better (worse)
crude oil prices mean higher
(lower) profitability, which
drives higher (lower) returns
and increased (decreased)
capital expenditures by an oil
company. Now, lower capital
investments in the oil business
means slower or even negative
production growth because the
output from existing wells
declines naturally with time. So
there is a constant need to
develop new reserves just in
order to maintain net
production. For example, last
year, Anadarko's crude oil sales
volume grew by almost 17%
y-o-y, but it plans to grow oil
production by just around 5%
this year, employing 33% less
capital. Similarly, the mid point
of EOG Resources’ projected
net crude oil production for the
year is almost in line with what
it did last year, around 288
MBD. The company plans to
spend more than 50% less on
the addition and development
of oil and gas properties this
year. ConocoPhillips also
announced during the first
quarter earnings call that it
now has just around 15
operated rigs active in the
Lower 48 states of the U.S.,
6 of 11 31/03/2017 15:51
down more than 50% from the

end of last year. As a result of
fewer active rigs, the company
expects its net production
growth from the region to also
start slowing down and
eventually turn negative in the
second half of the year.
Therefore, despite a 5% growth
in the first quarter itself,
ConocoPhillips maintained a
2-3% overall net production
growth guidance for the full
year. Chesapeake Energy also
plans to cut its gross capital
expenditures by half this
year. Because of similar
investment cuts across the U.S.
oil industry, the number of
active oil rigs in the U.S. has
fallen sharply over the past few
months. The chart below
highlights the trend in the
number of active oil rigs in the
U.S. and the WTI crude oil
price.
Now, we forecast net capital

expenditures as a % of revenue
for these companies, so the
absolute net capex figure
increases (decreases)
automatically with increase
(decrease) in oil prices and
7 of 11 31/03/2017 15:51
production because that

pushes revenues higher
(lower). Therefore, there is
only a slight increase
(decrease) in our net capex
driver in both the scenarios,
reflecting the long-term shift in
oil price dynamics and return
projections. The charts below
summarize our estimates of the
impact of the two extreme oil
price scenarios on net crude oil
production and earnings per
share of these companies for
this year.
View Interactive Institutional

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Estimating The Impact Of Different Oil Price Scenarios On Large U.S.... https://www.forbes.com/sites/greatspeculations/2015/05/29/estimating-...

Estimating The Impact Of Different Oil Price

Crude oil prices have been

scenario, and increase

But there could be a much

PixelPlanet PdfPrinter Demoversion - https://www.pixelplanet.de/pdfprinter-info.html

and it takes some of its oil off

On the other hand, if the OPEC

PixelPlanet PdfPrinter Demoversion - https://www.pixelplanet.de/pdfprinter-info.html

at least until the U.S. shale oil

See our detailed analysis

Apart from average price

and production operations.

Capex and Growth Impact

In addition to average price

down more than 50% from the

Now, we forecast net capital

production because that

View Interactive Institutional

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