US oil prices are back in the neighborhood of $20 a barrel. And they’re showing every sign of going lower as COVID-19 fallout depresses demand and Saudi Arabia ramps up output like there’s no tomorrow.
Natural gas prices, meanwhile, have sagged under $1.70 per thousand cubic foot. They may catch a break on the supply front this year, as cutbacks of shale oil production reduce output of associated natural gas. But that may be more than offset by sagging demand, should efforts to reduce COVID-19’s spread result in a big drop in electricity usage.
The bottom line is energy producers are facing their worst operating environment since the early ‘00s. And unlike the last time prices dipped in 2015-16, their list of allies on Wall Street grows thin, all but cutting them off from economic outside financing. In effect, they’re on their own to generate the cash they need to operate.
Nothing incites investor panic like a fast-falling safe haven. But the Federal Reserve's Monday announcement abruptly calmed what had been a growing rout in corporate as well as municipal debt. What’s left now is a massive supply of bonds with the highest yields since 2008.
Saudi Arabia’s decision last weekend to crank up production was the last straw for oil prices, already depressed by demand concerns resulting from global reaction to the spread of COVID-19.
Q4 results have three clear takeaways: The midstream sector stress test is well underway; best-in-class midstream companies have made needed adjustments; and no love from investors has created a major opportunity to lock in extremely high, sustainable yields.
It’s not hard to see the sell-off in oil prices and energy stocks in recent weeks has broadly corresponded to the spike in news interest surrounding the Wuhan Coronavirus. But, here's the good news.
Recently released Q4 results from some giant oil services providers have flashed a clear warning to investors in US midstream energy companies:There’s a sector-wide stress test in progress, and it’s not likely to let up at least until the second half of 2020.
Considering oil’s historic sell-off in recent weeks, it’s worth stepping back to look at the big picture and offer a more detailed short, intermediate and long-term outlook for the commodity.
Eight companies in our coverage universe have announced distribution cuts since the previous issue of EIA. We expect to see at least a like number by the time the next issue goes to post, as more management teams adjust guidance to sub-$30 per barrel oil. And we’ve accordingly added to the table, which now lists 39 companies from our coverage universes.
In the March 25 Energy Commentary “Energy Bonds are Ripe Again,” we highlighted an emerging fixed income opportunity in bonds of battered energy companies up and down the value chain.
Many companies have cut dividends since the previous issue of EIA. The sharp drop in the price of Western Canada Select (WCS) oil was the primary catalyst for cuts at ARC, Bonterra, Crescent Point, Vermilion and Whitecap.
To call the High Yield Energy List we launched last May a disappointment so far would be the understatement of the year. The one thing that went right was that none of the initial 10 recommendations has cut its dividend, with the exception of EnLink Midstream (NYSE: ENLC).
Elliott and Roger on Mar. 31, 2020
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