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Tag Archives: Bakken
Rail was seen as a lifeline for Canadian oil producers in the absence of new pipelines, but narrowing spreads between Canadian oil and global benchmarks in recent months is turning the business model uneconomic in an already depressed price environment.
Independent oil and gas company, Magnum Hunter Resources, which is active in the Utica, Marcellus and Bakken shale gas plays, has said it is to cut capital spending on its projects, citing low commodity prices.
In a conference call last week, chief executive Gary Evans said the expectation was that natural gas prices were expected to remain low until at least the end of the year.
Evans said that the board will meet this week to discuss the fiscal plans for the year, but expects expenditure not to exceed $100 million.
He explained that “when you’re in a death spiral of prices in this business, you’re crazy to be spending money… we’re not spending any money right now.”
The company is set to produce the equivalent of between 30,000 and 35,000 barrels of oil per day in 2015.
Oil prices have been sinking for months. And while that’s good news for most Americans, what happens to towns like Williston, N.D., that have built an entire economy around the oil industry?The drop in crude prices, while beneficial for drivers, has already cost thousands of oil jobs. Schlumberger (SLB) was among several companies to take a hit, laying off 9,000 people last week.”They said things aren’t good, that oil prices are low, and they aren’t going to be drilling as many wells,” said John Roberts, who was recently laid off as a crew van driver for Schlumberger. “They gave me 24 hours to leave my house.”Roberts, who was given housing by the company, is now staying on his friend’s couch. All his belongings are packed in his car. He’s not leaving Williston though, and is looking for a new job so he can continue sending money back to his wife and four kids in Liberia. John Roberts lost his job to falling oil prices.Roberts is the first of what many fear will be waves of layoffs in the U.S. oil patch as firms respond to the recent and largely unexpected plunge in crude prices.In North Dakota, the number of rigs drilling new oil wells dropped from 187 this time last year to 161 this week — the lowest level in five years.”My prediction is we’re down to 50 rigs by June,” said Jim Arthaud, CEO of MBI Energy Services, based in nearby Belfield, N.D.
Investors in the rail industry lately have measured their excitement by the increasing number of carloads of crude oil being shipped from the Bakken oil fields in North Dakota to refineries.
Crude oil shipments in the first nine months of 2014 amounted to about 362,000 carloads — more than double that seen the first nine months of 2012, according to the Association of American Railroads.
Yet the recent plunge in oil prices has chewed away at the stock prices of the major rail lines, as investors fear cuts in oil production could be at hand.
Rail executives say they aren’t dependent just on one industry. They have responded to the share price declines by reminding investors that crude oil is but one of many booming sectors that support rail. What’s more, they argue that rail — along with American drivers — has been celebrating the savings at the gas pump.
CSX Corp. announced last week its fuel costs in the fourth quarter decreased 12 percent from the year-ago quarter almost exclusively on a 49-cent drop in the per-gallon price of fuel. The Florida-based Class I carrier, with rail lines through Pittsburgh and much of the eastern United States, consumed 5.6 percent more fuel, yet saved $63 million directly attributed to the price decline.
“From any indication that we see, it’s a positive experience for the American taxpayer, for the American economy,” Clarence Gooden, CSX chief sales and marketing officer, told investors during the company’s earnings call. “So I think lower crude oil prices is very positive for our economy and very positive for CSX.”
Also positive for CSX were shipments of crude oil to East Coast refineries, as well as sand and chemicals to shale well sites. Railroads have particularly benefited from the fracking boom given the lack of pipeline infrastructure — its main competitor in moving oil and gas to market.
Energy-related carloads now make up nearly half of CSX’s industrial shipments and factored into its record annual revenue of $12.7 billion in 2014.
However, asked what would happen if shale production evaporated, Mr. Gooden downplayed its role and pointed out that crude oil by rail is less than 2 percent of the company’s business. Fuel costs, meanwhile, make up 15 to 20 percent of its annual expenses.
Oil’s biggest bust since the global recession was good for a few cases of whiplash.Just two months ago, Continental Resources Inc. (CLR), the shale driller founded by billionaire Harold Hamm, budgeted for $80-a-barrel oil and planned to spend $4.6 billion in 2015. Six weeks later, with crude down 29 percent in the interim, Continental cut its 2015 budget to $2.7 billion.Halliburton Co. (HAL), the world’s biggest provider of fracking services to oil companies, announced Dec. 11 that it would dismiss 1,000 workers. Two months earlier, Chairman and Chief Executive Officer Dave Lesar said “our sector will be fine” if oil prices range between $80 and $100 a barrel.Oil PricesThe U.S. shale boom that’s brought the country closer to energy self-sufficiency than at any time since the 1980s will be challenged in 2015 as never before. The benchmark U.S. crude price fell below $50 today for the first time since April 2009. Demand growth is weakening and OPEC, which controls 40 percent of supply, is unwilling to cut output.“The extent and rapidity of the price decline has been a surprise,” said Andy Lipow, president of Lipow Oil Associates LLC, an energy consultant in Houston. “They’re facing a new reality.” Photographer: Daniel Acker/BloombergPioneer Drilling Co. operations near Montrose, Pennsylvania, U.S.West Texas Intermediate reached a 2014 peak of $107.73 in June before dropping as low as $49.77 today on the New York Mercantile Exchange. The grade settled at $50.04 a barrel. That’s below the break-even price for 37 of 38 U.S. shale oilfields, according to Bloomberg New Energy Finance.RBC Capital Markets and CIBC World Markets predict prices will remain below $60 for the first three months of 2015. Societe Generale SA’s Michael Wittner forecasts an average of $64.50 in the first quarter and $61.50 in the second.
The United States Oil ETF (NYSEARCA:USO) was one of the top financial topics of 2014. It had performed admirably early in the year, but oil prices crashed and US unconventional economics have come into question. The selloff in oil has made little sense, and when it began many funds were overweight E&Ps, and hit hard trying to get out of those positions. Others have lost considerable investments trying to call the bottom in oil. The question is where will oil find a bottom, and when will this occur? Many think we are already there, but some estimates have oil going lower in 2015. We will go over the reasons we feel why oil is headed lower and how we are trading it.
We have been bearish oil and covered this in several write ups on Bakken operators that may not be economic at today’s oil price. Keep in mind the Bakken faces a more difficult situation as diffferentials are greater than in other US plays. In 2014, the average Bakken differential was approximately $11/bbl or $12/bbl less than WTI. We expect the average in 2015 to be between $13/bbl and $14/bbl. Currently this differential is closer to $16/bbl and we think its possible it will widen more. Differentials, whether Bakken, Permian and Eagle Ford crude, are different from one area to the next as they reflect several things like cost of transport, type of crude, demand, etc. The widening of Bakken differentials are mostly due to transport methods, but also we are seeing a decrease in demand as inventories continue to build in the US.
The Bakken doesn’t have the advantages of Texas crude, as there is only one small refinery in Mandan, North Dakota. The Eagle Ford is only a short distance from some of the largest, and most complex US refineries. Since there is limited pipe capacity, rail has become the main driving force to get Bakken crude out of the state. North Dakota production continues to outpace pipeline construction, but Pipelines cost hundreds of millions to billions of dollars to construct. Midstream companies won’t break ground until it has about 80% of the pipe filled via contract. Pipelines also like longer term deals. The rails are much easier, as costs are lower. Rail loading and unloading terminals cost much less and can be constructed quicker. Railroad crude transport deals are much shorter where three year deals are common. The pipeline advantage is cost, as its much cheaper than railing crude. We would expect that once pipeline capacity meet current production, Bakken differentials will tighten to approximately $6/bbl.
The stunning collapse in oil prices over the past several months won’t derail the railroads’ profit engine even if it does slow the tremendous growth in crude shipments seen in recent years.Carloads of crude oil spiked well over 4000 percent between 2008 and last year — from 9,500 carloads to 435,560 — as production boomed and the cost for a barrel of oil soared into the triple digits.Those prices have tumbled severely, to just above $50 per barrel Friday, and that has rattled some of the investors who have plowed money into companies like Union Pacific, Norfolk Southern and CSX.All three of those companies have seen their stock prices slip over the past month, along with major U.S. stock markets.But even with oil prices falling off a cliff, industry analysts and railroad executives point out that crude shipments still make up just a sliver of the overall freight delivered by rail. What’s more, because fuel is such a huge cost in the industry, railroads are a direct beneficiary of those falling prices.Crude oil shipments remain less than 2 percent of all the carloads major U.S. railroads deliver. Sub-$60 oil might force producers to rein in spending but railroads — which spend hundreds of million of dollars every quarter on fuel— will see their costs fall away.
A private club in North Dakota’s Bakken shale that once charged membership fees as high as $25,000 and served jumbo shrimp cocktail was evicted this month in a sign that oil’s plunge is undercutting the region’s go-go years.The Bakken Club was ordered on Dec. 17 to vacate its premises on Williston’s Main Street after failing to pay rent, state court records show. The club owed $21,598 for rent plus $1,329.90 in late fees, the landlord, On The Spot Development LLC, said in a Nov. 25 complaint. One check bounced.The eviction, in the capital of the oilfield that set off the record surge in U.S. output, comes as a price war casts doubt on the boom’s future. The benchmark for U.S. crude oil fell as low as $52.70 a barrel today, the cheapest since May 2009, from more than $107 in June. Drillers such as Continental Resources Inc., the Bakken pioneer led by billionaire Harold Hamm, are idling rigs and cutting spending.“There is going to be somewhat of a slowdown, it just depends how long oil stays at this level,” Joel Lundeen, the club’s co-owner, said by telephone. “Our plans are to reopen, and we have a couple potential places.”The Bakken Club featured a Tuscan-style menu (linguine pescatore, roasted rack of lamb), a 30-foot hardwood and copper bar, five high-definition TVs, meeting rooms, and an airport shuttle, according to its website. The cheapest membership cost $5,000 with a $250 monthly food minimum, while the highest level commanded $25,000.
Continental Resources (NYSE: CLR) has recently announced its plans to further cut its capital expenditures for the upcoming year but also projects the activity will increase production growth by up to 20 percent when compared to last year.Last month the company announced it would be cutting its budget from $5.2 billion to $4.6 billion. However, those figures have been updated and expenditures will now be cut from $4.6 billion to $2.7 billion. Since the summer, oil prices have dropped by nearly 50 percent with this month seeing prices hovering around $60 per barrel. Continental Chairman and Chief Executive Officer Harold Hamm said, “This revised budget prudently aligns our capital expenditures to lower commodity prices, targeting cash flow neutrality by mid-year 2015.”Additionally, the company plans to decrease its current operating rig count from 50 to about 34 by the end of the first quarter of 2015. Continental plans to keep 31 rigs in operation for the full year. Of these rigs, only 11 will be operating in North Dakota’s Bakken formation. Four of the remaining rigs will be operating in the Northwest Cana area of the Anadarko Woodford formation, and 16 will be operating in the South-Central Oklahoma Oil Province (SCOOP).