Despite cries to the contrary, big oil sees tremendous value in shale oil assets
- Shareholders are tired of multi-billion dollar project start up costs and the large oil firms are encouraged with the relatively cheap extraction costs in the lower 48 states.
- Large majors with cheap costs of capital (2-3% or less) will take over the entire sector.
- Large oil firms are dumping existing assets to concentrate on lower 48 shale.
- XOP components with high costs of capital (6-10% or more) are priced as if default is inevitable.
- Most independent’s assets will be sold off in distressed sales or bankruptcy auctions.
- Large oil firms can make money in shale with $40 oil. As the supplier pool consolidates, pricing power will return.
- We have been predicting that as interest rates fall loan growth will fall and access to cheap credit will actually be more difficult. Only the biggest and the best will be able to exploit the markets with their borrowing power.
BP announced the sale of its Alaska operations to Hilcorp Energy Co. for $5.6 billion. The sale includes BP’s stake in the Prudhoe Bay oil field, the largest oil field in North America that once produced 1.5 million barrels per day at its peak in the late 1980s. Hilcorp will also acquire BP’s stake in the Trans-Alaskan Pipeline.
For BP, priorities are shifting elsewhere. Notably, it bought up U.S. shale assets from BHP Billiton last year for $10 billion, and the British company has also vowed to divest $10 billion worth of assets between 2019 and 2020. In that context, BP’s sale of Alaska can be viewed as a pivot from mature conventional drilling operations to U.S. shale. “We see this move as part of a strategic shift by BP to focus further on US tight oil assets, having acquired a large portfolio from BHP last year,” Espen Erlingsen, Rystad Energy’s head of upstream research, said in a statement.
As Liam Denning notes in Bloomberg Opinion, BP’s sale is a sign of the times. Oil majors have been “retreating from traditional strongholds” in the last few years, pressured by shareholders to cut spending and steer clear of budget-busting megaprojects. Just about all of the majors have exited from Canada’s oil sands and many of them have been pulling out of the North Sea, for instance.
BP Exits Alaska To Double Down On Shale – OilPrice.com, August 28th
If we pay attention to the tired old conventional wisdom that shale oil is a scam and only a result of low interest rates, we will be distracted from the huge transformation taking place in the shale oil regions of the United States. It is easy to focus on the ongoing carnage in the shale oil explorers, prospectors, and service firms (XOP and OIH) and conclude that shale oil is a passing fad, but the large oil producers have been unloading billions of dollars in existing legacy oil assets to concentrate on cheaper domestic shale oil. As we had predicted a long time ago, as interest rates fall further, only the large multinational oil plays, like XOM and CVX, will be left standing with their ultra-cheap costs of capital. Now, we can add BP to the mix as well.
Exxon Mobil’s Corporate debt, maturing in March 2026 is currently yielding 2.02% and their net income for last year was almost $21 billion. CVX’s net income for 2018 was $14.8 bil. Even the largest independent P&E’s like EOG and PXD cannot hold a candle to XOM, CVX, and BP.
Even though WTI crude has stabilized in the mid-50s, the XOP components of frackers and producers are still tanking. Their costs of capital are just too high, they lack economies of scale and vertical integration, and suffer from bloated and inefficient management.
The independent P&E’s with junk bond ratings can never compete head-to-head with the largest oil producers oil. Firms with 8% borrowing costs cannot stay in business when their largest competitors can borrow at 2.0%.
In the new world order, low interest rates will not result in higher economic and loan growth. Sinking yields will only work to consolidate oligopolistic corporate and government control. These large firms can push the supply curve down and out and produce at lower prices, while the smaller firms lose out.