Oil & Gas Flash Alert - November 2014

Inventory:

United States light sweet crude oil prices recently settled below $80/bbl for the first time in more than 2 years. Lower long-term oil prices could reduce liquid-focused shale drilling which would result in the decline in associated gas which represents a large portion of North America¹s total natural gas supply.

As a result, any decrease in the U.S. associated natural gas supply could support higher gas prices across most regions, which could encourage power utilities to switch electricity generation from gas to coal feedstock¹s. The effect on steel producers would most likely be mixed, higher natural gas prices would increase the cost of finished steel and less drilling could reduce demand for steel in the form of oil country tubular goods thus reducing pricing there.

Machinery & Equipment:

Current and Future M & E values related to Oilfield & Gas Industry may decrease on many assets and asset classes due to the 30% fall in crude oil prices since June of this year, down from $115 a barrel to below $80 a barrel.

Some of the factors contributing to this potential decrease in equipment values:

  • US and global consumption is down.
  • National Oilwell Varco Inc, the largest U.S. oilfield equipment provider, said orders at a unit that make rigs and drilling components fell 60 percent, overshadowing a better-than-expected quarterly profit.
  • Oil and gas companies, facing increasing pressure from investors, have been cutting back on spending to increase shareholder returns. A nearly 25 percent drop in oil prices since June has also raised the possibility of a further capital expenditure cuts.
  • There is an oversupply of natural gas in the market while consumption is flattening.   The price of natural gas is staying around $3.75 to $4.50 CFM.  This is good for the consumer, but poor for the Oil & Gas industry.
  • Japan has announced this week it is in a recession stating that it's economy shrank 1.6% in the third quarter of this year. One of several global economic factors that will play a roll in big corporations decisions as it relates to deciding their future drilling budgets.
  • Wildcatting & new exploration will decrease, Investors and companies that have drilling permits will continue to drill until the first quarter of 2015.
  • Canada predicts that in 2015 Western Canada will see less spending as oil prices tumble in the tar sand fields.
  • A related issue attributed to the current economic situation is that some major companies will merge such as the announcement of Halliburton purchasing Baker Hughes as an example.
  • The US & Canada are hoping that the Keystone pipeline project will go through helping boost with jobs in that market but that has yet to be decided.
  • Hilco projects that in 2015, if there is not a stable increase in crude oil & natural gases prices, there will be likely be severe downsizing of fleets & inventory that will bring some of the values down anywhere from 10-30% from where we have seen them over the past three years.

It is important that banks and financial institutions increase their collateral monitoring of their customer's assets for the foreseeable future.