Financial Analysis of Oil and Gas Market – February 2017

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Despite the near record increase in U.S. oil inventories last week – an increase of 13.8 million barrels – oil prices traded up in February. The abnormal crude stock increase took inventories close to 80-year record levels at 508 million barrels, and is evidence that should worry oil bulls. However, the oil markets were not deterred. In fact, that has been a defining characteristic of the market in recent weeks – optimism even in the face of some pretty worrying signals about the trajectory of the market.

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Bubble size represents market cap

FIGURE 1: PERFORMANCE OF OIL AND GAS COMPANIES

Description: Figure 1 highlights the performance of the oil and gas industry for the month of February 2017 (x-axis) and the performance of the 11 months prior to February 2017.

Wall Street is allocating the most money to U.S. energy companies since at least 2000 amid growing confidence that the industry is emerging from the worst downturn in a generation. Energy firms raised $6.64 billion in 13 equity offerings in January, drawn in by a rich combination of oil prices consistently above $50 a barrel and a rush to drill that’s doubled the rigs in use in the U.S. and Canada since May.

Already, companies such as Weatherford International are able to charge more for the use of their equipment and services as explorers race to open the spigots in the fertile Permian Basin of West Texas and other U.S. shale fields.

The industry should see more activity this year as companies rush to conclude deals ahead of the rebound. With a favorable environment and deregulations by the Trump administration, M&A activity will rise substantially in 2017. E&P acquisitions and divestitures dropped off when commodity prices collapsed in late 2014, but have significantly ticked up since mid-2016.

A lot of the action, unsurprisingly, is occurring in the Permian Basin. ExxonMobil spent more than $6.6 billion in January to double its holdings in the Permian. 2017 is expected to be even larger than 2016 in terms of value of deals in the Permian. Last year, the industry spent $24 billion in mergers and acquisitions, a colossal sum that turned the basin into the hottest play in the country. With such heavy deal activity in the Permian Basin, the valuations of some deals may have become too frothy.

The boom in the Permian Basin will now lead to a rash of deals in the midstream sector, as more pipelines are needed to carry the larger flows of oil. In short, the sentiment in the oil patch continues to improve even as oil prices have faltered in the low-to mid-$50s per barrel. The flood of money back into the industry portends a strong rebound in 2017. It could also leave a lot of people and companies on the hook if oil prices fall back again.

Paul Leonardi's Bio

Paul Leonardi is the Duca Family Professor of Technology Management at UC Santa Barbara. He holds appointments in the Technology Management Program (TMP) and the Department of Communication. He is also the Investment Group of Santa Barbara Founding Director of the Master of Technology Management Program.

Dr. Leonardi’s research, teaching, and consulting focus on helping companies to create and share knowledge more effectively. He is interested in how implementing new technologies and harnessing the power of informal social networks can help companies take advantage of their knowledge assets to create innovative products and services.

He has authored dozens of articles that have appeared in top journals across the fields of management, organization studies, communication studies, and information systems research. He is also the author of three books on innovation and organizational change. He has won major awards for his research from the Academy of Management, the American Sociological Association, the Alfred P. Sloan Foundation, the Association for Information Systems, the International Communication Association, the National Communication Association, and the National Science Foundation.

Over the past decade, he has consulted with for-profit and non-profit organizations about how to improve communication between departments, how to use social technologies to improve internal knowledge sharing, how to structure global product development operations, and how to manage the human aspects of new technology implementation.

Before coming to UCSB, Dr. Leonardi worked at Northwestern University on the faculties of the School of Communication, the McCormick School of Engineering, and the Kellogg School of Management. He received his Ph.D. in Management Science and Engineering from the Center for Work, Technology, and Organization at Stanford University.

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Willem Buhrmann's Bio

 

Willem Buhrmann is an experienced mining professional that has extensive African and international experience in project management, strategy implementation and corporate finance. Willem was previously Business Development Manager (Africa) for Rio Tinto Energy and more recently consulted to the wider mining industry including majors and a variety of juniors. He holds degrees in finance (Chartered Accountant) and the legal world (LL.B.)

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