The deals have dried up, but “the wave is coming.”
Even if he hadn’t been paying attention to the Covid-19 news or watching the price of oil ($13.24/barrel today), Chris Atherton, president of EnergyNet, would still be able to predict fate. of the oil sector just from the phone calls he receives from people looking to sell oil fields on his online platform. Dealing with oil and gas operations, royalty interests, undeveloped acreage, etc. is like Ebay, for oilfields.
A year ago, Atherton, 43, was receiving numerous calls from companies keen to divest non-core assets and clean up their balance sheets. At the time, with oil prices at $60, the interest they were selling was selling at an average price of $42,000 per net barrel per day (so a 100 barrel per day field costs about $4.2 millions of dollars). As 2019 progressed, buyers became more picky and sellers more desperate. Many undrilled acreage did not sell at all.
At the end of February, the calls began to dry up. As the Corona crisis hit and oil prices plummeted, companies pulled their listings. “It’s on hiatus,” Atherton says. “When you have big swings in volatility, the asset sale market crashes.” This is especially the case for management teams who have accepted that the end is near and who are determined not to be second guessed in court.
The duration depends on the prices. That valuation per sinking barrel has plunged with the price of crude, to less than $20,000 in the roughly 40 deals EnergyNet completed in March and April. Even if the companies would like to get rid of assets, “if there are negative oil prices, a prudent judge will delay a sale”.
Incoming calls from Atherton are now coming from restructuring teams wishing to prepare EnergyNet. “The wave is coming.”
Atherton, ex-Enron, joined EnergyNet shortly after its founding in 1999, around the same time, he says, as the launches of Socks.com and AskJeeves. Competitors have come and gone, leaving EnergyNet to sell 200,000 properties over 20 years, for $6.8 billion. Atherton says EnergyNet has verified that today’s 40,000 registered users have access to $17 billion worth of dry powder ready to land deals. “If there is a positive side, there are a lot of buyers.“Their killer app: the digitization of the slightest information available on an asset and its surroundings. “We show all the production nearby. It contextualizes value, like Redfin or Zillow,” says Atherton. Over the past two years, EnergyNet has traded over $5 billion in properties, taking a 2-3% cut on every sale), including post-bankruptcy sales for Samson Resources, Linn Energy, EV Energy Partners, Swift Energy and Sanchez Energy.
Atherton watched the shale revolution unfold and marveled at the unwavering optimism of drilling engineers. In recent years, he has collected screenshots of favorite pages of oil company investor presentations, which show cross-sections of reservoir rock drilled by no less than 40 wells per square mile – a vision of efficient mass oil production that never lived up to the hype. Did they really think it could work? “I don’t think it’s nefarious or fraudulent,” says Atherton, just too optimistic.
Big banks are now setting up teams to manage assets – mostly in-house oil companies. Some have specialized in it, such as BOK Financial, controlled by Oklahoma oil billionaire George Kaiser. But it’s usually not something they want to do, says Georgetown University Professor Reena Aggarwal. Oil adds a lot of risk to banks’ balance sheets, especially assets that weren’t good enough to keep companies from failing in the first place. The banks want the oilfields wiped off their books, but don’t want to crystallize the losses. So they hold on, and wait.
This bear cycle won’t end without some Marquess names entering Chapter 11. Prior to Covid-19, many bankers viewed Chesapeake as “too big to fail” with access to sufficient capital to continue. to limp. Now the opinion has changed. With $9.4 billion in debt requiring $650 million in annual interest payments and operating profit expected to halve this year, Chesapeake has a limited track on the left. Its market capitalization fell to $300 million, while Chesapeake bonds maturing in February 2021 were trading on Tuesday at 7.75 cents to the dollar (from 95 cents in early January) according to FINRA data – as if the holders anticipated a total loss. “If they don’t voluntarily restructure at some point, they won’t be well positioned when the industry recovers,” says a consultant who advises banks on oil assets.
Indeed, when the industry recovers, surprises will await them in these reservoirs of oil. With the Covid-19 lockdown evaporating 40% of gasoline demand, storage tanks in the United States will reach “stevedores” within weeks. With no place to store their crude — at any price — producers began the labor-intensive process of shutting down their wells. Continental Resources of billionaire Harold Hamm has closed in all its approximately 200,000 barrels per day of production in North Dakota, and said force majeurerefusing to sell oil under contract to pipelines at negative prices.
It’s not like opening and closing a water tap. “Closures are not easy decisions. When production stops, problems arise. Multi-phase well flows begin to separate, while problematic hydrates, waxes and asphaltenes are formed, which will have serious economic implications,” Bernstein Research analyst Bob Bracket noted last week, sharing many examples of fields around the world that were flowing over 1,000 barrels a day before being shut down due to low prices – then never restarted. It’s a scary proposition when buyers value oil fields by how many barrels of oil they’re pouring per day. Uncertainty can be expensive. A closed field might only sell for half the price of an otherwise identical field that is still flowing soundly, Atherton says.
But how low can prices go? Last week, a few dozen fast one-month futures for West Texas Intermediate crude traded below -$30 a barrel, meaning sellers are paying buyers to take their oil away from them because they have nowhere to store it. Similarly, oilfields may sell at a “negative” value due to the magnitude of their associated liabilities related to plugging wells and remediating land. Atherton says that although EnergyNet typically collects its commission from auction proceeds, they are now able to sell these assets at negative price by accepting a success fee.
One company with huge potential remediation costs that worries analysts is California Resources Corp., which was set up by Occidental Resources in 2014 to take over California’s former giant Oxy oil fields, and has gone into debt, including more of $4 billion due by the end of 2022. CRC’s average global cost per barrel, including $19 in cash operating costs, $8 in interest, and $5 in overhead (per Bernstein) , is over $35 per barrel, which is too high for current oil prices. Yet CRC cannot easily shut down its operations, many of which rely on continuously injecting steam into reservoirs to extract stubborn oil. Add low oil prices to California politics and CRC may soon be unable to stay in business. “Sometimes I feel like I’m watching a comedy, sometimes a tragedy, but more and more it’s a horror story,” says Clark Williams-Derry with IEEFA. The 8% CRC bonds maturing in December 2022 changed hands in January at 45 cents on the dollar, according to FINRA data. Tuesday’s last trade was at 1.62 cents.
It seems fitting that California’s oil-rich San Joaquin Valley was the setting for the best oil movie of all time: Daniel Day Lewis’. there will be blood.
Too early to tell, but Atherton expects that in a year or so, the oil company bleed will turn into a flood of assets available on EnergyNet, bringing a buying bonanza not just for the capital types- investment, but for any accredited investor who has ever dreamed of owning an oilfield slice. If you’d rather stick with stocks, Bernstein analyst Bob Brackett suggests that most of the stock (and bankruptcy risk) will be about those low-value stock issues balanced atop mountains of debt, and suggests that Dedicated bottomfeeders could take a flyer on the biggest losers to date including Whiting Petroleum, Centennial Resource Development, QEP, Chesapeake, Callon Petroleum, Denbury Resources, Extraction Oil & Gas, Laredo Petroleum, Chaparral Energy and California Resources – bearing in mind mind that some will be a total loss. Brackett’s favorite oil producers, still near record lows but considerably safer, include ConocoPhillips, Hess, EOG Resources, Apache, Concho Resources and Pioneer Natural Resources.
Atherton and his partners realized coming out of the 2016 oil recession that EnergyNet’s fate was a little too tied to the oil industry. They have therefore worked to diversify their platform and now offer an exchange for 23 commodities, including helium, geothermal, surface rights for wind and solar, and even wood. They know how hard it is to break into a new business: Timber folks ignored their listings, until Atherton ordered his team to build a new entry, called Timber Online. It worked. “It’s a matter of perception,” he says. “Now they think we do it all the time.” Just a little insurance, in case this oil thing doesn’t work out.
For more on EnergyNet, check out my story from 2016: