Dutch bank Rabobank in March issued a report titled: “Offshore energy: Short-term dip, long-term rise” in which they provide an insight in the current market conditions and a forecast of what the future may hold for the global offshore oil and gas industry.
Offshore Energy Today interviewed Richard Brakenhoff, who has worked as an industry analyst at Rabobank in Utrecht, the Netherlands, since 2007. He covers the oil & gas, dredging, and transport sectors. Previously, Brakenhoff spent 17 years as an equity analyst at several banks covering the same industries.
In the interview he speaks about the oil price forecast, effects of oil and gas supply from USA, Saudi Arabia, Iran, and Petrobras’ bribery scandal, and he comments on reports that we might be seeing oil go as low as $15 per barrel.
He also touches a potential increase in Mergers and Acquisitions activity, spurred by the recent BG-Shell deal. Furthermore, Brakenhoff reveals which energy industry sectors are the first to suffer when the oil prices go down.
OET: Thank you very much for accepting the interview. Can you briefly introduce Rabobank, and tell our readers why you decided to make this report and why is it important for them to read it?
Brakenhoff: Rabobank is one of the largest banks in the Netherlands. In addition, the bank is one of the largest food & agricultural banks in the world. We decided to write the report ‘Offshore energy: Short-term dip, long-term rise’ as a significant number of large companies in this sector are a customer of the bank.
For the first time, Rabobank has released this report, whereby we have given our views on (i) the expected development of the oil price in the coming years, (ii) investment level of the global oil & gas industry, (iii) importance of the offshore oil & gas production on the total world oil & gas supply, and (iv) finally the outlook for the oil services industry, i.e. the companies offering their products and services to the oil & gas industry.
OET: According to you, what were some of the main causes of the drop in oil price that started in 2014?
Brakenhoff: The main cause of the drop of the oil price was the – unexpected – strong increase in the oil production in the USA (+1.6 million barrels per day (b/p/d) compared with the production level in 2013). Another cause was the somewhat disappointing growth in the global demand for oil (+0.7m b/p/d, whereas an increase of 1.0m b/p/d was expected at the beginning of 2014).
OET: You forecast the oil prices will average $50 per barrel throughout 2015. Also, you predict the same for the 2016. Can you briefly lead us through how you got these numbers?
Brakenhoff: Both in 2015 and 2016 global demand for oil will go up by around 1m b/p/d. Looking at the supply side, oil production in the USA will increase by another 0.7m b/p/d in 2015. OPEC (mainly Saudi Arabia) has spare capacity of more than 4m b/p/d and therefore can easily raise its production. In 2016 oil production in the USA is most likely to stabilize or to grow marginally due to sharply lower upstream investments made by the oil & gas industry (-37%). The forecasted higher demand for oil, however, can be met by higher production by the OPEC countries, such as Saudi Arabia.
“Question mark remains the impact of the current bribery scandal on Petrobras’ oil production.”
Depending on a nuclear deal and lifting of the sanctions, Iran could raise its production by around 1m b/p/d. In addition, Libya’s production level is very low at the moment (0.3m b/p/d), whereas the country produced approximately 1.5m b/p/d before the social unrest took place. Question mark remains the impact of the current bribery scandal on Petrobras’ oil production.
The company’s oil production was 2.15m b/p/d in 2014 and Petrobras targeted a production level of 4.2m b/p/d in 2020. Although the company has not yet released its new 5 year investment program, we believe that the current financial turmoil will lead to a substantially lower investment (CAPEX) program compared with the company’s previous plans (2014-2018) and therefore the oil production target of 4.2m b/p/d will have to be lowered as well.
OET: Do you believe low oil price is a “cure” for low oil price?
Brakenhoff: The current relatively low oil price is in our view a ‘cure’. The oil & gas industry was overheated in the last 10-15 years, leading to strong rise of the costs, such as wages, drilling rates, etc. The low oil price has led to a substantial decrease of CAPEX plans by the global oil & gas industry, which we estimate at 21% in 2015 versus 2014, leading a more ‘normal’ supply/demand balance and therefore declining costs.
“Saudi Arabia will maintain its production…”
OET: According to your report, deepwater oil production will double by 2040. What are these conclusions based on?
Brakenhoff: In the last decade most oil & gas discoveries were made in (ultra-) deepwater, particularly in Brazil. Thanks to technological improvements, the oil & gas industry can develop oil & gas fields in water depths of up to 3km versus ‘only’ 1km some 20 years ago. In the coming years also oil & gas fields with high temperatures and high pressure are likely to be able to be developed economically.
OET: In your report, citing IMF, you say Saudi Arabia needs at least $87 per barrel break-even price. Yet, at the current price at $57, they’re still not curbing the production. Is this, as they say, a fear of American shale and a fight to keep the market share?
Brakenhoff: Saudi Arabia will maintain its production level despite of its higher fiscal break-even price. Contrary to the early ‘80s, the country now wants to defend OPEC’s market share of around 42-43%, whereas OPEC’s market share plummeted from 51% in the mid ‘70s to less than 30% in the mid ‘80s. The current relatively low oil price leads to sharply lower CAPEX levels at the oil & gas industry in the USA, which eventually will lead to lower production levels.
“Iran has huge oil & gas reserves…”
OET: Due to it being published in March, your report doesn’t take into account the latest news on U.S. potentially lifting sanctions against Iran. Some reports suggest Iran’s huge oil reserves will flood the market now and push the oil price down, to as low as $15. What is your take on that?
Brakenhoff: Iran has huge oil & gas reserves. The sanctions, however, had a negative impact on the company’s investment level in its oil & gas industry in the last years. As a result, we believe that Iran could raise its production gradually by around 1m b/p/d, but we do not expect that the country will reach its historical production levels again. Therefore, we do not believe that a scenario of an oil price of USD 15 per barrel is likely.
Mergers & Acquisitions
OET: As previously reported by energy intelligence groups, 2015 will be a year of Mergers and Acquisitions. The Shell – BG Group takeover is a proof of that. Do you see more of the same happening this year and maybe in 2016?
Brakenhoff: Yes. The fall of the oil price (-50% between January 2014 and April 2015) has led to substantially lower shares prices of quoted oil services companies. The market capitalization of the quoted drilling companies – for instance- plummeted by 66% in the corresponding period. Also the share prices of other segments of the oil services sector were hit hard, such as shipping companies, FPSO providers, seismic companies, and installation companies.
Whereas the valuation of the oil services companies was historically high in the period 2011-2013, the current valuation can be interesting for financially sound oil services companies. M&A activities will not only strengthen a company’s strategic position, but also offer additional cost cutting possibilities in a market environment that is under pressure.
OET: In your report, you point out the fact that seismic surveyors and drilling contractors are the first in the supply chain to suffer from oil prices plunge. Can you paint some color on that?
Brakenhoff: Seismic and drilling are the first activities to develop new oil & gas fields. The oil & gas industry have announced to cut their CAPEX plans due to the lower oil price. First hit is the development of new oil & gas fields, because it would be financially unattractive to put on hold (mega) projects that are already partly finalized. These mega projects are for example the LNG projects in Australia, whereby the investment phase consist of many years.
OET: These tough market conditions open space for big and stable companies to go shopping, and take over the smaller, distressed ones. Do you see any of this happening in the seismic and drilling market, and where?
Brakenhoff: The low valuation of the quoted seismic and drilling companies is interesting. Therefore French oil services provider Technip stated to be interested to acquire French seismic company CGG in November 2014, however CGG was not amused by Technip’s approach. Without being able to give more names, the example of Technip & CGG will be followed by many more, we believe.
OET: Same question for oil companies? Wood Mackenzie is expecting ExxonMobil will be the one to pull the trigger on the next big deal? What do you think?
Brakenhoff: I cannot comment on individual names. In general the oil majors see the same opportunities as the oil services providers. An example was the recent acquisition of Talisman Energy by the Spanish oil major Repsol.
OET: Given the fact Rabobank is based in the Netherlands, with important supply chain players such as Heerema, Fugro, SBM Offshore and Boskalis, can provide your stance on the outlook of the Dutch oilfield services companies?
Brakenhoff: I cannot comment on individual names. The outlook for the companies depends on where they are in the cycle. Some of them still had a strong order backlog at year-end 2014 giving sufficient amount of work in 2015, whereas others already face substantially more difficult market conditions in 2015.
OET: Thank you Mr. Brakenhoff
You can read a 2-page summary of the Rabobank report here.