Market Update: Oil & Gas - September 2016

Market Update: Oil & Gas - September 2016

Price Stability: the focus of the upcoming OPEC meeting

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Price Stability: the focus of the upcoming OPEC meeting

With informal OPEC talks scheduled to take place in Algeria later this month, early comments from member countries signal that measures to "restore stability and order to the oil market" will be focus of the discussions.

 

The September issue of OPEC’s monthly report indicates that many of the cartel’s representatives expect strengthening demand towards the end of 2016. This is in direct contrast to the views expressed by the IEA, which anticipate oil demand growth to slow across the same time period.

 

Another telling mark is the ongoing tussle for the title of marginal producer, with Saudi Arabia reportedly overtaking the US as the leading global oil producer. This is mirrored in OPEC's own report, wherein it revised upwards its forecast for non-OPEC oil supply by 350k bpd.

 

All these indications point to a continued oversupply of crude at least in the short- to medium-term.

 

"Recently, there have been discussions of a production freeze, as favoured by Russian Energy Minister, Alexander Novak. Saudi Arabia's Khalid al-Falih, who is similarly motivated, indicated that there were other alternatives to production freezes. Both ministers agreed to "act jointly or with other producers" to pave the way to greater price stability.

The likely focus of the upcoming OPEC meeting will be to continue to bolster the current price floor. OPEC will likely be cautious on their wording so ensure that their comments don’t push the market into territory where the US shale producers will restart investment in production."

– Oliver Hsieh, Director, Commodity & Energy Risk Management for ASEAN, KPMG in Singapore

Continuing OFS margin divergence between US and international markets

The recent half year reporting season again illustrates the diverging margin performance between service companies in US shale and those in international markets. While almost all markets have shown a material decline in revenue terms over the past two years, the US slightly worse than average, margins in US shale collapsed in 2015 with limited pick up YTD, whereas international market margins have continued to be more resilient.

Continuing OFS margin divergence between US and international markets

The recent half year reporting season again illustrates the diverging margin performance between service companies in US shale and those in international markets.  While almost all markets have shown a material decline in revenue terms over the past two years, the US slightly worse than average, margins in US shale collapsed in 2015 with limited pick up YTD, whereas international market margins have continued to be more resilient.

Comparable EBITDA margins

The regional results of global players reflect this divergence. For example, Halliburton’s US results have shown a decline from 18% operating margins in FY14 to losses in the current period, whereas the erosion in international profits has been only 5% points. Schlumberger’s North American margins dropped 11% pts last year, compared to only a 2% point international reduction. Of the major European players, Technip has maintained its subsea margins at 14% over the period, and Wood Group has only suffered a 1% point annual reduction in margin.

 

The reasons behind this are complex – a longer offshore cycle and more long term contracts, arguably greater operator reliance on OFS in more challenging offshore environments and higher barriers to entry with fewer “mom and pop” competitors.

 

The key question of course is will they converge again? Is the US position unsustainable and must shale service providers margins rise, or will operators internationally be able as long term contracts roll off to force more pain onto service providers as they have done in North America? Many commentators think both these factors will drive convergence of margins.

– Alan Kennedy, Partner, UK Oilfield Service Leader, KPMG in the UK

Analyst estimates: oil

  2016 2017 2018 2019
July Avg 44.9 57.9 71.0 73.5
August Avg 44.9 57.4 71.0 73.5
July Median 44.9 56.3 70.0 72.0
August Median 45.2 56.3 70.0 72.0

Analyst estimates: gas

  2016 2017 2018 2019
Min 2.3 2.8 2.9 3.2
Average 2.4 3.1 3.3 3.5
Median 2.4 3.1 3.2 3.5
Max 2.5 3.5 4.0 4.0
 
  2016 2017 2018 2019
July Avg 2.4 3.1 3.4 3.5
August Avg 2.4 3.1 3.3 3.5
July Median 2.4 3.2 3.3 3.5
August Median 2.4 3.1 3.2 3.5

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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