First things first: the blog has been eerily quiet for the last two and a half months. Yeah well, I was a little busy with work and enjoying my summer – sue me. I don’t think I missed any big stories other than Elon Musk trying his best to destroy TSLA’s stock price or every bitcoin speculator piling their money into weed stocks – but in any event the blogging engines are fired up and as a first order of business I’d like to touch on something very dear to me: energy markets.
I wrote a blog in late June discussing the lack of midstream assets / capacity in the Permian and what impact that would have on regional WTI and nat gas spreads. You’ll recall that Scott Sheffield, CEO of Pioneer, predicted that WTI Midland would trade at a discount of $25/bbl within the next quarter. Well here we are three months later and the discount is ~$15/bbl – not quite $25 but still a sizable Midland / Cushing spread. On top of that, Permian natural gas is trading at an all time low of $0.66/mmBtu compared to Henry Hub product which currently sits at $2.98/mmBtu. This is bad news for Permian producers. The worse news, though? It’s about to get worse as refineries enter maintenance season this fall / winter. As refineries shut in for scheduled maintenance, the demand for crude will drop in lockstep. With even less demand for crude in the markets, Permian producers will be forced to reduce prices even further, eroding already delicate cash flow profiles.
It’s likely that some producers will have to shut in production and move rigs away to save cash for the spring and summer months. You may even see some consolidation among smaller independents and private equity drillcos – although many of these players may be too indebted to make a transaction like that pass muster with their boards / investment committees in this environment. Whatever does happen, it will be interesting to see how it plays out. One thing’s for certain: the E&P space is no stranger to booms and busts, good times and bad. The industry always makes it through, it’s just a matter of what players are left to fight in the next round.