Beautiful day where I am. Thought I'd collect some thoughts and share with this board. As always use or flush (as someone brilliantly coined the phrase). This is the view from the 36 year experience oilfield engineer.
Oil Price Outlook: My view in the last 2 months is the same as I first commented, only further convicted. Crude prices in the US could momentarily drop below $30 and this could happen several times. Reportedly US storage space is about to reach capacity in the next few months. Without ability to export much, producers will have to sell or shut-in, rather than produce and sell or store. Unless the Feds act soon, that could drive a big domestic price crash. But even if they do, the global price could also fall as much. Many companies have dropped a lot of rigs. But for onshore what they have done is drilled and cased the wells but NOT completed them. These horzontal wells (many in the range of a mile long horizontal) are simply waiting to be completed, which in most cases does not require a drilling rig and takes just a few days, but due to the ~30 separate frac treatments per well, can account for 60% of total well cost. So to put these wells on production is like switching on a light switch. Production can rapidly ramp up if prices are there, without rehiring drilling rigs for quite a while. Some companies have moved remaining drilling rigs to gas prospects where they can get better pricing in some locales and lower drilling costs. So all of this makes the USA the "swing producer", not Saudi Arabia, which is why they are trying to snuff us out. So this fact means for the short term, prices will be volatile, as we have seen, but trending downward as supply continues to increase faster than demand. The really big factor that will cause prices to rise very high and stay high for a much longer time is the availability of skilled oilfield workers. This is a light switch right now, meaning industry can ramp up quickly by simply rehiring all the laid off workers, but before long, they won't be available due to re-employment elsewhere, retirement/death, and lower enrollments in the most relevant sciences & engineering. This is exactly what has happened before. It takes time - years of suppressed prices to gradually reduce the skilled workforce, especially the professional engineering and geosciences guys. So availability of skilled labor will eventually become the controlling factor affecting prices unless demand rises soon and/or there is some "agreement" globally to reduce supply more aggressively. The shortage of skilled labor coupled with continually growing world demand may send prices skyrocketing well beyond $100, keeping them there for a few years, until outrageous salaries and signing bonuses re-stimulate growth in graduations in the key technical fields. So this outlook I have is unchanged.
Demand is of course a blacker box. The shorter term bright light there could be India, who reportedly has the fastest growing economy in the world. If their faster growing demand can outpace the global economic downturn and slower growing demand in China and elsewhere, then the a supply/demand balance has a chance to be restored. Maybe the blackest box of all is the Middle East. Reportedly Libya, whose production had peaked recently, is now down again due to the Islamic insanity causing chaos in much of that region. I think this instability is likely to worsen, and could become another "swing effect" driving down supply. This more complex economic system, where the USA is no longer the dominant swing consumer, but instead the swing producer, makes accurate predicting, an increasingly unlike result (especially "about the future" as Yogi Berra would say). So I spend time trying to to watch and undestand if we are going to shift to the long term high price scenario, as that is the direction we are headed as long as layoffs continue to occur. Of course once we shift to that 100+ price world, if the price gets too high and hangs there too long, then a lot of negative fallout could follow. It takes 4-5 years (5 for two of my kids) to get a PETE degree. Then another 5 years of experience to develop enough competence to be able to make a serious contribution. So you can begin to picture a very long term, high price world to follow which will be directly related to the length of time prices stay down.
IOC PPS Outlook: This board amazes me as to the depth of detail you have in analysis and opinions. Mine are higher level observations since I don't have the time for more depth. But nevertheless, here's what I see. Hession, true to his word, is delivering, but much slower (which means more costly), than I want and only offers vague updates. Nothing new there. But as many of you have stated, this is all going to come foreward. I believe that there are large volumes in E/A and elsewhere in IOC's PNG holding to be developed and have no doubt it will eventually. Hession has the best approach for E/A with the near term and later term recertification rights which can add tremendous additional value to IOC. So the uncertainties regarding the resource side of this and the vehicle to get it to market (i.e., Total and an future LNG plant) are dramatically de-risked from even a year ago, and those residual risks will mostly vanish by around year end. From there on it's a question of time, cost, product prices, and politics (both PNG and global). Cost is driven by market timing/negotiating, competency (where IOC has lagged poorly), and God's structure of these reservoirs. The latter one of these will determine how many wells and lengthy flowlines will be required to drain the reserves, and in almost every field, this is a learning process over time as the field is produced. The appraisal wells will remove a big part of this risk, but there will be a large residual remaining which will mostly affect the upside outcome. The timing it takes to deliver an LNG plant and additional wells, will become much more predicatble as we go foreward. But until contracts for construction and gas sales are announced, the revenue/cost predictions needed to project future value accurately, still IMHO have high uncertainty. My thinking is that the volumes and location in PNG, that IOC has control over, can override a lot of these concerns and risks by making them a lowest cost global producer, as several of you have suggested. But I suspect at some point the politicians will exploit that situation with higher taxes or other schemes designed to take value away from the companies and transfer it to the government and/or people of PNG, which seems to be an eventual certainty. It's just a question of when and how much. Witness Indonesia's government intervention in the copper industry, violating prior agreements, forcing processing of the ore in country, which up to now has been done elsewhere. By having to build these plants in country and process the ore there, huge costs have been imposed on the operating companies in order to create more economic prosperity for Indonesians. This is just what governments do. Remember the Windfall Profits Tax applied to crude oil produced here in the USA in the 1970/80's? Assuming that IOC/TOT/OSH will be hugely successful in PNG, then it will happen in some shape or form eventually. But I think that could be 10+ years off; not a worry now.
Another prediction I have is a global LNG glut is coming. It's inevitable just like oil gluts are inevitable. It's just a question of when. Prices have already dropped, in part due to the linkage with crude, causing many LNG projects to be cancelled. Technology is too good and getting better at producing oversupplies of everything on earth. The nice thing about PNG as everyone keeps saying, is that LNG produced there is likely to be the lowest cost LNG at least for the Asian market. So that threat, as it grows, may actually help IOC ultimately, by reducing new development in more costly places, and thus reducing supplies. I.e., exactly as the Saudi's are hoping for crude oil right now. So PNG could become a swing producer somewhere down the road and greatly capitalize when LNG prices climb back upward. But for me, this is not a big factor now in considering the value of IOC, but definitely something to keep an eye on.
So in summary, from my viewpoint the picture looks much improved for IOC pps. Much uncertainty is derisked and more will be derisked in this year, in addition to the payments and announcements, which should help PPS. The current low PPS is out of balance with the current realities. I think fear of where oil prices are headed are driving much of that. If we were still in an $80+ oil price world, I have no doubt the PPS would be a whole lot higher. Market conditions for LNG, costs (especially around the number of wells required per TCF), and politics are the big needle movers I will focus on going foward in addition to crude prices. The gas volumes in place are there, and estimates are only going up from here for many years to come, I feel fairly confident of that, based on drilling results today and current leases. So my investment outlook? I hope oil prices drag IOC down below ~40 again before Concept Selection announcement and/or recertification payment and/or FID, and then buy IOC. And if it stays down long enough, my company just might once again have a nice staff reduction, with a lucrative severance package. I think the probability of both of those events occurring this year or next is far from zero.
Have a nice weekend.
Kaliboo
