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.
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.