Navarik Market Update

August 17, 2017


Offshore oil production has been taking a battering of late. Low oil prices have been eating into margins for all types of production generally, but particularly for offshore given the associated higher capex and opex costs of building, moving, and running what is effectively a floating oil town. The pessimism around this category of reserves was apparent this week, as the first regionwide Gulf of Mexico oil field lease auction under the Bureau of Ocean Energy Management’s new program showed tepid interest. The count of bids, sum of bids, and number of bids per available blocks were all down from the previous auction.

However, the counter-intuitive underlying takeaway from this is that this may point to a recovery. The oil producers which bid on these blocks are going to receive these assets for a reduced price, reducing exploration and production spend and opening up possible margin space. Likewise, oil rig services companies which operate in this space and which were previously too small to stay afloat in the current environment have recently undergone a spate of consolidation. A major part of shale’s continued competitiveness despite low prices has been the reduced outlay to services companies, and if the newly merged rig providers are able do something similar to spread out fixed costs and stick to more disciplined spending, they can likely stomach a continued bear market and return some of this padding to their clients.

In what is turning into a recurring theme across the non-OPEC oil patch, producers have become aware of the realities of low oil prices and have (with varying degrees of success) adapted. Despite naturally preferring higher profits now they are locking in assets and contracts that could widen their upside if and/or when prices eventually rise and stay elevated. Oil majors need a continued stream of new reserves to replace those they draw down due to regular operations, and increasingly break-evens are finally catching up, meaning with the advance of time firms are going to organically retire older higher-cost reserves with the new leaner and meaner production bases. This clearly wasn’t the kind of “rebalancing” that OPEC had in mind.

Further Reading:
Oil and Gas Journal, Aug 16 2017
Financial Times, Aug 16, 2017

Figure 1

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Source: Baker Hughes

Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.

To reach a Navarik Oil & Gas analyst email tradeflow@navarik.com. To reach Colin directly call 778-327-6917 or email cmccann@navarik.com.

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