Energy players are looking at all options to forge ahead.
The U.S. Energy Information Administration (EIA) report released yesterday forecasts energy prices are not expected to recover soon with WTI oil prices staying below $50/barrel until end of 2021. Energy players are looking at all options to forge ahead. Oil giant BP announced earlier this week that it will cut 10,000 jobs to reduce costs. Not surprisingly, all energy companies have been looking to cut spending as oil prices have swooned in recent years beginning with a slide in 2015 from over $100/barrel to below $50/barrel. In the last 5 years, oil prices have remained volatile, gyrating from below $30/barrel in 2016 to almost $80/barrel in 2018 and then crashing to near zero earlier this year, before rebounding to $38/barrel yesterday.
This volatility has shaken up the industry and many energy companies are taking the predictable path of reducing expenses and deferring capital expenditures. Meanwhile others are looking at unexpected saviors, from private equity and competitors, financial investors and lenders, to utilities and corporate consumers, from hedging with Wall Street banks to public funds from Congress.
Oil markets have experienced significant volatility over the last 5 years, with low of $30/barrel to ... [+]
Private Equity And Larger Competitors See A Buying Opportunity
Some oil companies are shedding valued assets to generate cash or looking at selling the company outright. This has created a buyers market for private equity and larger companies. This is a unique opportunity to buy good assets with proven producing reserves at low valuations from distressed buyers. In March this year, Carl Icahn increased his ownership of Occidental from 2.5% to 10%. Some smaller independent energy companies may look to stave off bankruptcies by selling to larger competitors. While Anadarko wasn’t in danger of bankruptcy, the enduring low oil prices nudged it to agree to be bought by Occidental in mid-2019.
Banks May Choose To Help Rather Than Lose All
Some energy companies are struggling with debt covenants as lower prices result in lower earnings. Lenders have the difficult choice of calling the loan which may push the company into insolvency or renegotiating the loans and further extending their liability. Refinancing the debt creates opportunities for financial investors to buy the debt or partner with the company in some debt-to-equity conversion. Chesapeake Energy with $9 billion in debt was able to renegotiate debt covenants on Dec 3, 2019. Nonetheless, their high leverage and continued low oil prices have raised expectations of imminent bankruptcy filing or potential debt restructuring. Intense investor interest and activity pushed the share price up from $14 on Friday to $84.75 on Monday, with 22 trading halts as detailed in the Forbes article on Chesapeake insane market action on June 9th.
More Corporate Treasurers Turn To Wall Street For Protection
Many energy companies and their large customers are vulnerable to oil price fluctuations which can be over 50% in any given year. To hedge that risk, they may turn to Wall Street for protection. Many corporate treasurer eschewed derivatives after the 2008 financial crisis but may return to using oil futures or options to protect against the volatility.
Some Corporate Energy Consumers Return To Fossil Fuels
Some cash-strapped corporate energy customers are looking to reduce energy costs. Companies with large fleet of corporate cars may evaluate their total cost of ownership under low oil prices and decide it makes sense to keep their gas cars rather than investing in new electric vehicles.
Solar and Wind Companies Getting Help From Coal
Broadly, low oil prices make renewable energy companies a less competitive alternative. However, the Covid-19 crisis has resulted in an unusual trend. Offices and schools and stores are closed for shelter-in-place and many companies are running at lower production or not at all, so electricity demand has dropped. Utilities are shutting down the swing production which is usually coal. Meanwhile, the sun is shining and wind is blowing so solar and wind energy continues. As a result, the overall energy production mix has seen a decrease in coal and increase in renewables. EIA forecasts coal’s share of electricity generation to fall from 24% in 2019 to 17% in 2020 with renewables increasing their share from 17% to 21%.
Risk-averse Utilities Could Take Long-term Positions To Reduce Supply Volatility
Utility companies are generally risk-averse and take conservative operating decisions, under the stewardship of public utility commissions. While there is some risk in committing to long-term supply agreements, the current low prices may give them an option to lock in favorable prices with some indexing to inflation or future oil prices to maintain some flexibility. Weak oil and gas producers have even approached some strong utility customers to proactively search for a friendly buyer. It’s not common to see utilities buying their suppliers but in this environment, assurance of continued supply for the utility buyer and averting bankruptcy for the energy producer are potential drivers to vertically integrate.
The Government Is Considering Private-Public Investments In Energy
Congress is considering a bill to provide $35 billion to create 5 million jobs in the clean energy sector. National polls show 4 out of 5 voters want Congress to invest in new jobs that build clean energy infrastructure, such as wind turbines, solar panels, power lines, and electric vehicle charging. The Clean Energy Jobs Fund, as the bill is called, would pair each government dollar with roughly $3 from the private sector to build a range of projects. Each public dollar invested is repaid and preserved by the fund, which means dollars can be recycled to stir even more private investment in the future.
