cash costs

COVID-related demand destruction and the oil price meltdown have engulfed energy markets and companies in a thick, pervasive shroud of doom and gloom. But investors and analysts have hit upon a potential bright spot for one segment of the industry: Gas-Weighted E&Ps that had been battered by the decade-long shift of upstream capital investment to crude-focused resource plays. The massive cutbacks in 2020 capital investment by oil producers triggered by the recent, dramatic decline in refinery demand for crude will reduce not only oil output, but associated gas production as well. That drop in supply raises the prospect of meaningful increases in natural gas prices in 2021 –– hence Wall Street’s new interest in Gas-Weighted producers, whose equity values have taken off in recent weeks after a big plunge earlier this year. There’s a lingering concern though, namely that LNG exports — a key driver of gas demand for U.S. producers — may be slowed by collapsing gas prices in key international markets. Today, we discuss what’s been going on. 

E&Ps have long been accustomed to negative investor sentiment and the depressed stock valuations that come with it. But who among them could have anticipated the first quarter’s devastating one-two punch of coronavirus-related energy demand destruction and the collapse of the OPEC+ supply-management effort that for more than three years had propped up crude oil prices? E&Ps responded by slashing their 2020 capital spending plans and touting how much of their 2020 production is hedged. But there’s no doubt about it, the E&P sector is in for particularly hard times, as evidenced by Whiting Petroleum’s Chapter 11 filing last week. A major impediment for Whiting and other already hobbled E&Ps is a cost structure that, for many, significantly exceeds the current price of oil. Today, we discuss what an examination of more than 30 E&Ps’ lifting, DD&A and other costs reveals about the companies’ ability to stay afloat in rough seas.