[rockdoc123]

Something I have been thinking about lately is the impact of current capital markets with respect to peak oil. Most people when they think of peak oil contemplate it in the sense that it all has to do with geology, as long as there is oil in the ground people will drill for it and as it becomes more scarce the price will rise and companies will still drill. Of course we’ve seen the impact of high prices on demand but that demand destruction didn’t slow down a lot of oil and gas companies from exploring.

Certainly the economics around exploration and production come into effect. If the price is too low and costs are too high companies won’t invest. But I see now developing a situation where the price is high enough and costs manageable enough for companies to make profits but the lack of ready funding available from capital markets could seriously slow down explorations and development, certainly so with small to mid-size publically traded companies.

Over the past year or so there has been a negative disconnect between the S&P and most Oil and Gas companies share prices. There are exceptions but for most companies with market caps below a couple of billion dollars their stocks went down as much as 40-50% in the past year and have not come back more than a percentage or two whereas the general S&P went down but has now come back. This leaves a considerable gap which means both institutional and retail investors have lost all interest in investing in oil and gas. A few of the companies that I follow are now trading at levels similar to when oil was at $40/bbl….it’s now at $100 + with no sign of dropping below $90 for any length of time.

So how does this impact E&P you ask? Lets imagine that you are a senior executive in a small independent O&G company. The majority of your compensation sits in the form of stock options. In most cases you are well enough off so that you really don’t need a salaried job….you are doing this because you want to build a small company into something big but you also aren’t prepared to do it with no reward in site. Given the potential that your company’s shares will never see a significant rise in the foreseeable future how long are you prepared to continue plugging away when you could just as well be out golfing/sailing/ skiing etc and not suffer any financial problems? My point is that without the capital markets being there as an incentive there will likely be fewer small to medium independents and the ones that remain will not have the “best of the best” leading them.

When you look at the shale gas/oil revolution that completely changed the shape of gas production in North America (and will likely do the same for liquids) it was orchestrated by small companies, not the majors. Even internationally many of the discoveries that have opened up new basins were accomplished by the small to intermediate players (Kosmos in Ghana, Heritage in Uganda being examples). The majors have had a role to play in the ultra-deep water drilling but they are much more risk adverse when it comes to exploration.

The small to medium independents are hence what can help to smooth out the bumpy plateau that is peak oil. Without them I suspect you will see either an earlier decline or some serious whipsaws.

[Pops]

I wonder how much that line "shale gas/oil revolution" and the ads run by the industry around 60 Minutes, news broadcasts, etc have had on their own ability to raise money.

Who wants to invest in an industry that assures us at every turn that oil and gas will be plentiful and cheap for decades to come - in fact even cheaper because of the newfound "glut"?

[Plantagenet]

Investors typically look for economic growth in companies as a way to decide where to invest their money and they don't see a lot of growth potential in the energy biz right now.

Theres a glut of natural gas and prices are at near record lows, so money parked in CHK or CRR or FTK isn't going to do much for years to come.

Conversely, oil is at near record highs, so the growth potential there for XOM, BP, etc. may be limited as well.

Where is the growth story in the energy biz right now?

Of course if we get a ME war or a double dip recession, then we shake the etch-a-sketch and restart the game.

[rockdoc123]

Of course if we get a ME war or a double dip recession, then we shake the etch-a-sketch and restart the game

I don't think so. As I mentioned most of these companies have shares trading at the same level as when oil was at $50 or so. I did a plot not that long ago of oil price versus share price for a number of intermediate and small independent companies and the two tracked for quite sometime but are now completely disconnected. So I doubt even a war which could jump Brent to $140 pretty quickly would have much of an impact.

As to another recession, these shares are already down close to where they were when S&P bottomed out. Not much further for them to go. Many are now trading at less than NAV and in some cases less than cash on hand.

From what I can tell watching the US market all that money that was sitting on the sidelines late last year is starting to make its way back into the market in financials and technology and some manufacturing. Not a lot flowing back into energy shares.

[Pops]

I've heard the talking heads say that the "bull market in commodities" is over and it's back to equities now. I guess that equities related to commodities would also be expected to go down?


...a 200 year chart showing the 10 year average rate of return for all commodities:

http://tradersnarrative.wordpress.com/2 ... different/

What I think is funny about that little chart are the labels: WWI, WWII, Cold War and

March 2011

What happened then? Or what is happening now on the level of a world war?

[seahorse3]

Peakoil and economics can't be "decoupled" as they say in economics. Isn't this topic related to the old discussion that, in the end, a recession brings about PO faster? Basically, if oil exploration isn't profitable, then new fields aren't brought online to offset existing declines? It seems this is basically the same topic, but more refined with more evidence now on how this issue is affecting the exploration companies.

[Keith_McClary]

When you look at the shale gas/oil revolution that completely changed the shape of gas production in North America (and will likely do the same for liquids)

I've read that it's all about liquids now (since they're priced like oil), there is no money in dry gas. Is that exaggerated?

[rockdoc123]

I've read that it's all about liquids now (since they're priced like oil), there is no money in dry gas. Is that exaggerated?

it is now. The breakeven price for pretty much all of the dry gas plays is above $3/Mcf. Up until late last year a lot of companies still were hedged to higher prices so they could produce at a profit even when the spot price was lower. Those hedges are basically all gone now.
A lot of the gas has liquids in it and those are still valuable so there is still a lot of gas production which will keep Nat gas prices low for several more years I think. Some of the gas drilling continues just because operators don't want to lose the acreage.

[rockdoc123]

Basically, if oil exploration isn't profitable, then new fields aren't brought online to offset existing declines? It seems this is basically the same topic, but more refined with more evidence now on how this issue is affecting the exploration companies.

not what I intended with the discussion. What I'm saying is that although it may be economic to produce oil and gas (gas outside of north america) a lot of the small to intermediate companies may just go away or become ineffectual simply because the capital markets aren't there to support their share price regardless of how profitable the company is. You can't keep senior executive in small to intermediate companies interested if there is no upside to share prices (their compensation is predominantly in options) and if you lose the senior executive or end up with the "bottom of the barrel" management then reserve replacement will suffer. My point was that fickle markets can have an impact on the shape of peak oil independent of economics.

[seahorse3]

RD, I guess I don't see a big distinction between "fickle markets" and "economics." In the end, you're saying the economic incentives aren't there for the smaller exploration companies to do what they do (require bigger share price); therefore, the exploration will be limited.

Why share prices of the explorers aren't going up is an interesting question. Some have argued that banks and even gov'ts are buying up stocks on some of the exchanges, and that this is the cause for the rise in the stock prices as a whole. Maybe these investors, whoever they are, are trying to save the "consumer driven" economy by investing in select stocks they believe are necessary to save "the economy" I don't know. But its interesting to me that the shares of the exploration companies aren't rising as you point out. I would like to understand why.

There's a one, two punch hitting us now in the West, and that is refineries closing bc they aren't profitable (causing rising fuel prices here which further hurt the economy) and also, as you point out, oil exploration companies are not increasing in value which may cause exploration to be cut back. Neither of these are good things.

[rockdoc123]

the point on refineries is pretty important as well I think but more due to it's feedback on overall economics. Regardless that it seems to currently be profitable for most corporations to explore for and produce their oil, the inefficiencies in refineries mean that in order to stay in business they will have to increase their margins which can't happen at higher prices. This may be more of a regional effect than global I suspect.