Oil up despite signs of more output
U.S. oil initially retreated Thursday amid signs of resurgent U.S. crude production, a boost from the nation’s shale plays spurred in part by the recent rally in the oil market. But oil prices ended the day up a few cents.
The Energy Department said U.S. stores of crude have fallen for the fourth consecutive week, but it also said the nation’s oil companies pumped up crude production by more than 300,000 barrels a day last week, reversing a small decline seen in recent months.
The nation’s output grew to 9.57 million barrels a day, the Energy Information Administration said, though analysts have warned against relying too much on that production data, as it has a significant margin of error.
“It’s significant growth even if it’s half that,” energy research firm Wood Mackenzie analyst R.T. Dukes said. The rising oil production was likely a response to the rally to $60 oil, Dukes said, noting the EIA’s production number is what Wood Mackenzie would have expected the U.S. to pull if the oil bust had never happened.
Still, it is unlikely shale oil producers will be able to snap back quickly enough to push prices down again significantly, at least in the near term, because it takes a lot longer to ramp up rig crews than it does to dismiss them, Dukes said.
The U.S. crude standard inched up 17 cents to $57.68 a barrel on the New York Mercantile Exchange. Brent, the international benchmark, increased
59 cents to $62.65 on the ICE Futures Europe. Earlier in the day, both prices dropped a bit before making a U-turn.
Even as oil edged up, talk of corporate acquisitions emerged this week among offshore service providers that have been hit by the 11-month oil slump and a drastic glut in deep-water drilling equipment and offshore vessels.
The CEO of vessel contractor Tidewater says the oil bust could be an opening to scoop up smaller rivals in marine services, as corporate consolidations could help offshore companies cope with the downturn.
New Orleans-based Tidewater has a fleet of nearly 300 vessels used in global offshore oil field projects, and it could be a big consolidator because it has plenty of cash after cutting capital spending and working budgets this year, CEO Jeffrey Platt told investors this week.
Big footprint
Because the company has a big footprint across many markets around the world, most acquisitions would enable it to clear out duplicate costs and boost revenues.
“If there are to be consolidators, I think Tidewater has the right attributes for it,” Platt said. “I’m not hoping for an extended downturn, but a little bit of consolidation wouldn’t hurt the industry. I’d also caution that ours is a very fragmented industry, so consolidation is not going to be the magic answer.”
Oil field services companies are signaling they may decide to pair up to bolster their balance sheets and bottom lines during lean times, like the current oil slump. Last month, the CEOs of Cameron International, National Oilwell Varco and Frank’s International all said their bigger, more flexible balance sheets could put them in a position to snap up smaller rivals during this downturn.
Halliburton’s plans
Halliburton is preparing to sell off three units that make a combined $3.5 billion in revenue as it makes room for Baker Hughes, which it is buying for $35 billion. So there could be an influx of deals among oil field service companies if crude stays cheap.
But for deep-water drillers, it may be a while before there are many deals. Earlier this month, the CEO of Houston rig contractor Diamond Offshore Drilling said it is not the right time to strike a deal because offshore assets and companies are still overpriced.
“There are assets available now, but frankly the bid-ask spread is too wide,” Diamond CEO Marc Edwards said during a conference call, referring to the difference in what sellers are asking for and what buyers are willing to shell out. “We have not quite reached the sweet spot yet. I think in the next six to 12 months there will be better opportunity.”
Executives running other drilling companies echoed the sentiment. As for Tidewater, whose main business is in marine service vessels, rather than bulky deep-water rigs, “really attractive investment opportunities will take at least a couple of quarters for potential counter parties, as valuation expectations recalibrate,” said the company’s chief financial officer, Quinn Fanning.
“So in the near term we’re focused on managing our costs, managing our capital program, and if, with the passage of time, opportunities are created, we will be prepared to act on them,” he said. “We have an absolute and relatively strong financial profile that would allow us to do that. Others probably don’t have that characteristic.”
On Thursday, the EIA said crude stores dropped by 2.8 million barrels during the week ending May 22, coming in at a total 479.4 million barrels. Stores of crude oil at the trading hub of Cushing, Okla., fell by 400,000 barrels to 60 million barrels.
‘Controlled’ declines
“What we are witnessing is really a very controlled seasonal decline that we continue to view as more a function of refinery inventory management objectives rather than any tightness in supply,” Citi Futures analyst Tim Evans said in a note to clients.
Refineries pulled in 16.5 million barrels a day in the week ending May 22, boosting their draw by 237,000 barrels a day.