This column continues my series on $80-per-barrel oil and U.S. shale winners and losers.
I think that many people are misreading the purpose of this series. Most are looking at the most superficial message; as I mention specific companies that will likely run into spend difficulties in a depressed oil environment, they imagine that I'm bashing these firms and telling investors to stay away. Nothing could be further from the truth.
We've seen forward-looking CEOs report this quarter on how lowered margins will trim projected capital expenditures. We've heard from companies as well-financed as Hess (HES), which announced an $800 million reduction, ConocoPhilips (COP), Rose Resources (ROSE) and, particularly, Continental Resources (CLR), the best positioned of the Bakken participants.
But understand my point: Spend reductions will lead to production growth reductions, no matter what fantasy world these CEOs try to evoke on conference calls. And as we come to smaller market cap and more specialized oil companies, the fantasies from conference calls seem to reach Disney-like proportions. Let's be clear: Missed production targets will further crater these already-under-pressure stocks, bring out the last ditch revolver credit lines and bond bogeymen, and ultimately force serious slenderizing of activity and assets in these names.
We need that kind of "Oil Darwinism" to start to work -- not only to stop the breakneck, irresponsible overproduction of U.S. shale assets, but also to allow pipeline and transport networks to "catch up" and restore reasonable basis prices from the Bakken and Permian to WTI.
More importantly, we need some weak hands to fold in order to again deliver a reasonable premium for oil that allows companies to make good profits for shareholders, sovereign nations to balance budgets, and that also lets alternative energy sources compete with fossil fuels. Did you know that high oil prices are not just an oil trader's dream? They are an environmentalist's dream as well. However, this period of low oil prices first has to sustain itself long enough to crush the "weakies." And we'll continue to look for them.
Some of the areas that I believe will be first to show the strain of sustained lower prices will be in the Mississippi Lime and the Tuscaloosa Marine Shale (TMS). Let's examine some of the players there.
The TMS is an easy target for difficulty and not a long stretch to focus on. Both Halcon (HK) CEO Floyd Wilson and analysts at several banks have labeled the TMS unviable at $80 oil. Wilson has said that Halcon will abandon development of the TMS and focus instead on its Bakken assets to try and ride out this $80 winter. But as I pointed out in my last column of this series, the company's issues in the Bakken are only slightly less challenging.
Goodrich Petroleum (GDP) doesn't have the "luxury" of withdrawing from the TMS. About $300 million of its $375 million in capital expenditures for 2014 are directed at the TMS, while slowly converting out of the Eagle Ford shale; for the fourth quarter of 2014, Goodrich's estimates are for more than two-thirds of production to emerge from the TMS, or over 4,000 boe/d.
These two mid-cap companies trace the outlines for all the players in the TMS -- big troubles are ahead.
Similarly, the Mississippi Lime payback has not shown itself at the level of other major shale plays. The biggest player there, Sandridge Energy (SD), is still laboring under the mismanagement history of former CEO Tom Ward and his forays into the Gulf of Mexico, in addition to its strange natural gas arrangement with Occidental Petroleum (OXY), which has likely caused a misstatement of earnings and now a shareholder suit. Meanwhile, the company's various MLP trusts in the Miss Lime have been investment disasters and the drop in crude prices won't help one iota.
Sandridge is hardly a small oil company, with yearly production of 28 million barrels of oil equivalent, but it is headed in the wrong direction and speaks volumes about the viability of the Miss Lime with oil at $80.
These three rather large oil companies show the difficulties even multi-billion dollar market cap oil companies are going to experience in an $80 oil environment. The point of this series is to try and total up the production losses from these lesser players and see how that might affect the U.S. market in the long haul. That will be the focus of the last set of columns in the series, scheduled to continue next Thursday.
