2016 is only two weeks old, but it sure does feel longer than that. In just two weeks, oil is down 18%, oil service stocks have lost 14%, and shares of E&P companies are down 17%. It is widely expected that 2016 will be a year of rebalancing, which will be unpleasant.
Today, we are trying to look beyond the 2016 carnage in front of our noses and imagine the O&G world of 2017. Regular Oilpro readers know that our house view is everything bottoms in 2016. This doesn’t necessarily mean growth comes roaring back in 2017, but it does mean that contraction fades into stability.
2017 may seem an eternity away, but a blurry shape is starting to form, and some baseline expectations have been set. So without further ado, here are some early high-level thoughts on what 2017 may look like in O&G:
- Sharp Oil Production Declines. There is no defined consensus, but most observers (ourselves included) share the view that global oil production will be contracting meaningfully by 2017, particularly in the US. Even with OPEC going full tilt and shale more resilient than expected, low oil prices will take their toll. The massive global spending reduction of approximately 45% from 2014 levels + time = production curtailment. The question is: will it be enough to consume the glut?
- Oil Demand Should Be Higher. Consensus expectations are for an increase in global oil demand of 1.2mmbpd by early 2017. Chinese growth concerns and spreading macro economic concerns are potential flies in the ointment, but we still expect more oil will be burned in 2017 than in 2016.
- NAM Capex Bounce? We evaluated Wall Street consensus expectations for a group of 59 independent E&Ps. After falling 48% in 2015 and another 26% fall forecast in 2016, the market is looking for a spending rebound of 16% in 2017. This seems a bit on the high side of likely, but if oil fundamentals improve, companies may be willing to spend a bit more next year to fend off production declines.
- Less Oilfield Competition. A wave of bankruptcies, distressed sales, equipment attrition, and rig scrapping will occur over the next 12-24 months. This means the oilfield service landscape will look very very different in 2017. Fewer companies and less equipment chasing work could enable a pricing / margin rally in 2017 for oilfield service even with no incremental drilling. In other words, an activity-less recovery may be in the cards.
- Jobs Growth Possible. Because of the massive cash burn the industry is going through this year, lay-offs will likely overshoot to the downside. By 2017, companies should be dipping their toes in the job market again, selectively hiring out of the pool of skilled, sidelined workers. Companies will be motivated to nibble in the jobs market even ahead of a big activity recovery because i) stability will foster recovery predictions, ii) they will realize the loss of skilled workers has adversely impacted operations, and iii) they’ll want to hire the best available talent before their peers do.
- E&P Focuses On Short Cycle, Lower Cost Projects. The industry is rethinking its approach to field development. By 2017, new protocols will be in place to evaluate final investment decisions. The industry’s appetite for long lead time and cost intensive developments will be a fraction of prior levels in 2017. As a result, offshore investment allocations could increasingly move towards onshore projects.
- WTI Oil Price Expectations. We don’t maintain an in-house oil price forecast, but we monitor the consensus view. The median forecast for the 38 analysts polled by Bloomberg is $60/barrel in 2017 vs. $50 in 2016 and the current spot price of $30.60. Downgrades lie ahead as the consensus view needs to catch up to the recent sell-off. The futures price for 2017 delivery is currently $41/barrel (market in contango).
- HHUB Nat Gas Price Expectations. We don’t maintain an in-house gas price forecast, but we monitor the consensus view. The median forecast for the 23 analysts polled by Bloomberg is $3.25/mmbtu in 2017 vs. $2.85 in 2016 and the current spot price of $2.28. The futures price for 2017 delivery is currently $2.77/mmbtu (market in contango).
While it’s still early to completely give up on 2016, it is looking like this may be a lost year for our industry. By 2017, further downside will be limited, but how much upside can be reasonably assumed for 2017? Answering this question is more an exercise in imagination than fundamental analysis as we remain adrift in uncharted waters.
— Joseph Triepke, Oilpro Managing Director