Oil & Gas Market Trends

Industry Insight

COVID-19 Industry Brief

EFFECTS OF THE CORONAVIRUS ON THE Oil & Gas INDUSTRY Update June 18, 2020

DOWNHOLE TOOLS AND E&P EQUIPMENT AND INVENTORY Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline. Oil Market Capital Expenditure Falling: As of the week of March 28, 2020, the North American oil majors had slashed 2020 exploration and production (E&P) budgets by 30 percent to 40 percent (on average). Year-to-date active rig counts were down 28 percent through the end of March and are expected to continue dropping. Market Sentiment: Values for downhole tools and assets related to oil field E&P will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand. Industry Fallout: Several large operators in the space (Transocean, Nabors Industries, and Superior Energy Services) collectively have $7.0 billion of debt set to mature over the next two years. Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oil patch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020 as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company had retained bankruptcy counsel, possibly in preparation of a new filing, or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based E&P company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection, in mid-June. According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. Energy research firm Rystad Energy, based in Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020. Liquidation Market Happenings: Gordon Brothers has recently seen activity in this space and proposed an orderly liquidation of an oil and gas servicing company, Tri-Point Oil and Gas Production Systems. Valuation Outlook: Gordon Brothers expects that secondary market demand for anything other than ongoing well-servicing equipment, such as lift equipment or other niche sectors, will be severely depressed for as long as this price environment lasts.	DOWNHOLE TOOLS AND E&P EQUIPMENT AND INVENTORY
MIDSTREAM AND UPSTREAM Oil & Gas Market Conditions: West Texas Intermediate crude oil at $22 to $24/barrel and at single digits in Alberta, Canada (Western Canadian Select at $4.18/barrel on March 30, 2020), makes almost every oil play unprofitable in North America with the exception of a minimal number conventional plays. Assuming no governmental intervention, this will materially reduce new drilling activity to near zero within three to six months, potentially reduce existing production in western Canada, and delay completion on many already drilled wells. Market Sentiment: Midstream activity in the near- to mid-term will likely be stable, given that oil and natural gas wells will still flow for several years. However, fall-off is expected over the next few years, assuming that the current pricing environment does not move. Market Drivers: It is likely that pipeline construction activity will be somewhat insulated due to the backlog of pipeline projects currently underway. Compression-related assets will likely be impacted less than production assets and the low price of natural gas will likely support further demand in this space from electrical power generators. Valuation Outlook: From an appraised value perspective, most of the assets Gordon Brothers sees in this space are machinery and equipment. We would expect that secondary market demand will be weak, and the medium-term outlook will be weaker in the COVID-19/Saudi-Russo price war environment due to an anticipated future reduction in natural gas production volume.	MIDSTREAM AND UPSTREAM
OCTG Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline. Oil Market Capital Expenditure Falling: Through April 2020, the North American oil majors had slashed 2020 Exploration and Production (E&P) budgets by an average of 30 to 40 percent from 2019 levels. Oil Country Tubular Goods (OCTG) Production Closures: U.S. Steel idled tubular operations indefinitely at its facilities in Lone Star, Texas, and Lorain, Ohio on March 24, 2020. Tenaris S.A. similarly announced a suspension of operations at two plants in Koppel and Ambridge, Pennsylvania, affecting 560 workers. Texas Steel Conversion, an oil country tubular goods (OCTG) processor and drill pipe manufacturer sent Worker Adjustment and Retraining Notification (WARN) Act notices to all 491 employees who work at five facilities throughout Texas on May 29, 2020. These facilities were producing various products but had a heavy focus on OCTG. The WARN Act requires that employers provide at least 60 calendar days of advance notice of any mass layoffs or plant closings. Tariffs: A favorable ruling was released by the Department of Commerce on April 9, 2020, regarding an affirmative final determination in the antidumping duty investigation on imports of oil country tubular goods from China. This resulted in a final dumping rate of 29.86 percent to 99.14 percent for multiple Chinese OCTG importers. OCTG Pricing Trends: The U.S. OCTG market flattened in June 2020 after two consecutive monthly drops indicating that the recent supply cuts were at least partially offsetting the demand loss. The monthly S&P Global Platts domestic OCTG assessment remained flat as of June 1 with import prices dropping by 1.4 percent. PipeLogix reported a decline for the month of May 2020 of 4.9 percent based on its index of 62 individual OCTG products. Despite recent increases in oil prices, sustainability of the pricing uptrend is still being questioned by U.S. oil producers, reducing market sentiment. Market Sentiment: Distributors’ sentiment (as measured by PipeLogix) in the OCTG space turned sharply lower in March 2020 to 24, signaling a significant market contraction; it has hovered at these low levels through May, hitting 22 in April and rising slightly higher to 25 in May. New orders were practically non-existent for all distributors, and the price outlook score was very weak, with unsold inventory levels growing. Seventeen straight months of declining prices, tariffs, and depression-level impacts on demand are having a crushing impact on this sector. Bankruptcies: Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oilpatch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020, as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company retained bankruptcy counsel, possibly in preparation of a new filing or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based exploration and production company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection in mid-June. According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. In addition, Rystad Energy, an energy research firm based out of Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020. Market Outlook: Values for downhole tools and assets related to oil field exploration and production will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand. Valuation Outlook: Concerning appraisal values from an inventory perspective, Gordon Brothers expects a material drop in tier I volumes. Tier II is expected to be limited to low volumes due to market conditions and a weak structural market. Scrap is expected to be negatively impacted based on market weakness. Equipment values in this space will be similarly impacted.	OCTG

Date April 2021

Current Trends

Crude oil prices, as reported in Cushing, Oklahoma, went negative on April 20, 2020, as oil markets collapsed. However, as of April 19, 2021 prices had recovered significantly, increasing over 600% over the same time last year to $63.33 per barrel.
The North American rig count remained down slightly as of April 23, 2021 over the same date in 2020; however, current counts represent a significant improvement over historic lows seen last year
Starting in mid-March 2020, the majority of live equipment auctions across the U.S, Canada, and the UK were either cancelled, postponed, or completed 100% online due to pandemic concerns. However, with the increasing roll out of vaccines and easing of restrictions, some auctioneers are returning to auctions with onsite participation.
Values remain somewhat depressed for equipment directly related to oil and gas exploration.

Gordon Brothers by the numbers

Synopsis

Industry Rebounding After Crash: On April 19, 2021, the West Texas Intermediate (WTI) per-barrel price of oil hit a rate that was over 600% higher than the same date in 2020. For the period from April 1 through April 19, 2021, the average price per barrel was approximately $61, representing pricing not seen since the end of 2019. While still lower than the low- to mid-$70s pricing of 2018, current prices have recovered significantly over the historic lows seen in 2020.

It has taken a full year to recover from the failed attempts in March 2020 to cut back oil production by Saudi Arabia and Russia. The cutback was intended to offset the decreased demand resulting from the coronavirus outbreak. However, the talks ended in failure and resulted in a price war primarily involving Saudi Arabia and Russia. The price war was settled on April 12, 2020, but the market did not react well to the settlement, the last phase of which remains in place. The settlement secured a production cut of 9.7 million barrels per day from May 1 to June 30, 2020, 7.7 million barrels per day from July 1 to December 31, 2020, and 5.8 million barrels per day from January 1, 2021, to April 30, 2022. As a result of the March 4, 2021 OPEC+ meeting, production cuts were maintained due to a downward adjustment of the group’s demand forecast by OPEC+ technical experts.

At the same time the impact of the COVID-19 pandemic worldwide pushed oil consumption forecasts down by 20% to 30% for 2020. Consequently, crude oil prices declined precipitously, with prices falling to below $20 per barrel for WTI crude in late March and briefly reaching negative levels on April 20, 2020, as the market attempted to find a supply and demand balance and storage locations domestically and globally reached capacity. As a result, U.S. crude oil output fell 6.4% to 11.47 million barrels per day in 2020, down from a record of 12.25 million barrels per day set in 2019.

Another factor weighing on recovery of the industry is the continuing pandemic. Though the rollout of vaccines is increasing, the global slowing and transition of business activities lingers. Employees and consumers continue to work remotely in many parts of the world. Business and recreational travel has been slow to recover, only partially mitigating considerably reduced consumption levels of gasoline, diesel fuel and aviation fuel seen over the last year. As economies recover, business travel, daily commuting and vacation travel will return to more normal levels, increasing fuel consumption levels. As these levels stabilize, Gordon Brothers expects that secondary market demand for downhole tools and exploration and production equipment and inventory could experience a recovery in values toward pre-pandemic levels.

Active rig count Remains Depressed: The North American market saw a steady decrease in rig activity throughout 2019 and 2020 due in part to the decline and volatility in the price of crude oil, funding problems for smaller operators and demand reductions produced by the COVID-19 pandemic. Based on reporting by Baker Hughes, as of April 23, 2021, there were just two fewer rigs drilling for oil and gas in North America as of the same date in 2020, which was the week oil prices went briefly negative in the wake of the Saudi/Russia price war. Nevertheless, although down slightly from last year, that number represents a significant recovery from the low of 289 reached on June 26, 2020.

Despite changes in the oil and gas industry, particularly since the shale oil and natural gas industries have ramped up production in recent years, active rig counts can still signal the willingness of oil and gas companies to continue investing. Per oilfield truck and tractor manufacturer Tiger General, rig counts can also anticipate a demand for products used in the oil service industry, such as drilling, producing and processing hydrocarbons.

current appraisal consideration: At its 13th OPEC and non-OPEC Ministerial Meeting (ONOMM) on January 5, 2021, OPEC members and producers agreed to keep the groups’ collective output flat. The meeting recalled the decision taken by all participating countries at the 10th ONOMM held on April 12, 2020, to “adjust downward overall crude oil production.” Separately, Saudi Arabia announced it would unilaterally cut production by one million barrels in 2021. The markets reacted favorably to this news with West Texas Intermediate futures, the U.S. pricing benchmark, rising above the $50-per-barrel mark for the first time since February 2020.

However, within North America exploration will likely remain limited. Many U.S. shale operators reacted quickly at the beginning of the pandemic by announcing cuts to capital expenditure, or capex, spending, which is money spent on fixed assets. Capex spending for 2021 is expected to remain flat or increase only slightly. In many North American regions, given the risk of completing a successful well along with the cost to drill, the completion and operation of a well currently does not have the future economic benefits necessary for investors to take on the projects, and lenders are hesitant to finance oil and gas equipment directly related to exploration. Without sustained, relatively stable oil pricing at the current levels, the availability of capital to take on projects is expected to remain limited.

It is important to understand the depressed nature of the oil and gas market. Though the price of oil appears to have somewhat stabilized in the $60-per-barrel range, the tentative stability and fluctuations in the price of oil have created an economic environment in which the exploration for oil and gas will continue to be somewhat diminished.

valuation outlook: In terms of downhole tools and equipment, Gordon Brothers expects that secondary market demand for anything other than ongoing well-servicing equipment, such as lift equipment or other niche sectors, will be somewhat depressed pending stabilization of crude prices at current levels or higher for a sustained time period.

Concerning appraisal values for oil country tubular goods from an inventory perspective, Gordon Brothers expects a material drop in Tier I volumes. Tier II is expected to be limited to low volumes due to market conditions and a weak structural market. Scrap is expected to be negatively impacted based on market weakness. Equipment values in this space will be similarly impacted.

Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.

Reference sources: BAKER HUGHES, ENERGY INFORMATION ADMINISTRATION, ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES, POYNTER INSTITUTE, THE ASSOCIATED PRESS, FEDERAL RESERVE ECONOMIC DATA