TheChek News Flow

Supply response key over next few months

We continue to believe it may take another few months to have greater confidence in the extent of the US supply response and whether it is sufficient. At the conference, the bulk of companies indicated

they plan to keep 2016 capital expenditures within cash flow or within cash flow after asset sales, and companies with existing 2016 guidance/commentary appear likely to reduce their guidance over the next

two months. So companies are directionally moving towards the mindset of $40/bbl oil or less when setting budgets (vs. $50/bbl in 4Q15); continued low oil prices are needed ahead of actual guidance.

 

Activity falling, but OFS deflation persists

With oil prices at low levels, oil service companies have limited visibility on how weak 2016 could be – land drillers predicted rig activity could fall another 10%-20% in the US and around 10% in the international markets. Offshore drillers project a drop of 10%-15% in jack-up/floater rig count in the coming 12-months. There was mixed commentary on services/product pricing with stabilization for pressure pumpers/land drillers and continued declines for offshore equipment/sand/well servicing.

Conference M&A datapoints mixed

Super majors (XOM, COP) noted the bid-ask spread as it relates to producer M&A is relatively wide, although XOM noted the spreads are showing signs of tightening. Among E&Ps, the need to take out

weaker balance sheet producers’ debt at a significant premium to current levels made M&A something that many viewed as less likely. Offshore drillers and midstream companies indicated potential

consolidation activity may pick up in the year ahead.

 

Equity issuance a double edged sword

Pioneer’s $1.4 bn equity offering (Jan 5) could open the door for others to test waters, particularly given credit market tightness. We believe other companies – particularly those seeking to avoid a credit rating

downgrade and/or those expecting oil prices to fall in 2017 – could look to issue equity. While this could help individual companies, it has increased investor concerns that financial stress is insufficient to bring

oil markets back into balance.

 

Sentiment is bearish NT; constructive LT

Investors are not calling for a sharp recovery in oil prices, though there is still an optimistic view that the oil market will begin to tighten in 2H 2016.