Official (Alberta) Oil Discussion Thread

[IliketoPuck]

Tron - I read through your posts last night, and thought I would try to explain how the E&P lending industry works a bit more clearly for you. It's an industry I worked in for several years in Calgary, so I know it quite well.

So, here goes!

Lending to the energy industry in Calgary can be broadly classified into two categories:

1. Borrowing base loans (secured)
2. Covenant based loans (either secured or unsecured)

A secured loan simply means that the bank lending the money has the right to enforce security (i.e. take ownership) of a borrower's assets if certain conditions related to the company's overall health deteriorate. An unsecured facility means that if the company goes bankrupt, the lender does not have an immediate ownership claim on the company's assets, although they will have a priority in the court process as a debt lender.

A borrowing base loan is how banks lend money to smaller producers (typically those below 40,000 boe/d). The loan is based on a risk adjusted view of the value of the company's reserves, production, hedge book, and future capital spending plans. The borrowing base loan is usually reviewed by the banks twice each year (in the fall and in the spring), and the commodity price deck that is used to value the company's reserves and production is updated frequently to reflect market prices, with another risk adjustment included. Broadly speaking, if oil is at $45/bbl, you might see a bank's price deck anywhere between $30/bbl and $40/bbl. The reserves are evaluated by a third party engineering company (GLJ / Sproule) and the bank's own internal petroleum engineers as well. These types of loans are extremely risk adjusted, and do not reflect a 1:1 market value for the company's reserves and production; something more like 0.5:1 or 0.6:1.

A covenant based loan is typically reserved for the larger producers. When a company gets to around 40,000 boe/d of production, they will typically shift to a covenant based loan that can be either secured or unsecured. Unsecured loans tend to be reserved for the largest companies in town (Suncor, Encana, CNRL, etc.). These are governed by typical balance sheet / income statement tests like Debt/EBITDA, Interest Coverage, Debt/Market Capitalization, etc.

In the case of Penn West, they used to have a unsecured covenant based loan facility (if I recall correctly), but as their production and company outlook deteriorated, I believe the banks amended the credit facility to provide for security to protect their downside.

In general, I understand why you don't trust banks after reading/watching the Big Short - I personally never trust a single thing that Goldman Sachs ever says. While there certainly continue to be aspects of banking in general that lend themselves to that type of behavior, I can tell you from personal experience that the lending culture at Canadian banks is far more conservative and tightly controlled than in the States.

Not to get too far off track, but Canadian banks are part of the BASEL III guidelines, which represent the strictest lending protocols globally. Last time I checked, the American banks hadn't even adopted BASEL I yet. Basically, the Canadian banking industry is the global boy scouts of lending institutions.

Certain companies will go bankrupt in town as a result of this downturn, I would say that lenders are culpable to a certain extent in giving the borrowers enough rope (loans) to hang themselves, but the companies also need to accept the majority of the responsibility for not managing their finances prudently.

Feel free to ask any questions and I will do my best to answer.

[blueski]

Is it wrong to hoot out loud in an office setting when checking the price of oil? I feel like after the last two years of crappy prices, this recent rise deserves at least a bit of enthusiasm.

[fundmark19]

Originally Posted by blueski

Is it wrong to hoot out loud in an office setting when checking the price of oil? I feel like after the last two years of crappy prices, this recent rise deserves at least a bit of enthusiasm.

Double meat kind of enthusiasm?

[nik-]

Just remember that the quicker it goes up, the quicker we get to the point that shale producers #### it all up again.

[Izzle]

^ It almost seems like Oil now has a cap of $70 due to the shale producers. I dont know what the shale well's decline rates are but, I think, $70 is going to be the max for the next few years, as things stand now.

[Flash Walken]

Originally Posted by Izzle

^ It almost seems like Oil now has a cap of $70 due to the shale producers. I dont know what the shale well's decline rates are but, I think, $70 is going to be the max for the next few years, as things stand now.

It's my thinking that this was addressed earlier in the thread and why predictions that oil prices will rebound is on a timeline of 5-10 years out?

Seems to me that that is the stark reality of this oil bust, Alberta oil extraction is in tough unless a technology can be developed that makes Alberta oil competitive with the shale operations in the states.

But that's only what I've gleaned from this and some other threads / news articles, someone want to jump in here to set me straight?

[guzzy]

Originally Posted by Flash Walken

It's my thinking that this was addressed earlier in the thread and why predictions that oil prices will rebound is on a timeline of 5-10 years out?

Seems to me that that is the stark reality of this oil bust, Alberta oil extraction is in tough unless a technology can be developed that makes Alberta oil competitive with the shale operations in the states.

But that's only what I've gleaned from this and some other threads / news articles, someone want to jump in here to set me straight?

I would disagree here. I think the technology is here. Alberta's problems are labour rates, plain and simple. We have a huge sense of entitlement. Some drilling companies are now putting modern rigs with staff out at $9k a day. I realize that is break even number but compare that number to two years ago and you will see a big problem. The drilling and service side of oil and gas is by far the greediest. Albertans need to learn to be efficient at every level if we want to be competitive - engineering, construction, drilling, service, operations. We need to make our selves better.

[IliketoPuck]

Originally Posted by nik-

Just remember that the quicker it goes up, the quicker we get to the point that shale producers #### it all up again.

I disagree.

Commodity prices have been low enough for long enough that material damage has been done to balance sheets.

There will not be an immediate resurgence of rigs and shale producers. The capital isn't there. Companies will focus on repairing their balance sheets, and a slow ramp up in rigs is more likely, IMO.

[Weitz]

Originally Posted by guzzy

I would disagree here. I think the technology is here. Alberta's problems are labour rates, plain and simple. We have a huge sense of entitlement. Some drilling companies are now putting modern rigs with staff out at $9k a day. I realize that is break even number but compare that number to two years ago and you will see a big problem. The drilling and service side of oil and gas is by far the greediest. Albertans need to learn to be efficient at every level if we want to be competitive - engineering, construction, drilling, service, operations. We need to make our selves better.

I bet you work at a producer.

[nik-]

Originally Posted by IliketoPuck

I disagree.

Commodity prices have been low enough for long enough that material damage has been done to balance sheets.

There will not be an immediate resurgence of rigs and shale producers. The capital isn't there. Companies will focus on repairing their balance sheets, and a slow ramp up in rigs is more likely, IMO.

You sir are more optimistic than I.

[burn_this_city]

The shale guys are far too wounded to redeploy anywhere close to the number of rigs they had working previously. Most of the production growth was fueled by cheap debt that has all but dried up.

[GGG]

I would say we are competitive with shale. Money can be made at $60 oil. We started the boom 12 years ago at $30 oil.

Shake has pre drilled capacity which at $50 oil can be exploited but to drill the next well they will need higher.

[Slava]

Originally Posted by IliketoPuck

I disagree.

Commodity prices have been low enough for long enough that material damage has been done to balance sheets.

There will not be an immediate resurgence of rigs and shale producers. The capital isn't there. Companies will focus on repairing their balance sheets, and a slow ramp up in rigs is more likely, IMO.

Originally Posted by burn_this_city

The shale guys are far too wounded to redeploy anywhere close to the number of rigs they had working previously. Most of the production growth was fueled by cheap debt that has all but dried up.

I think that the cash has dried up for the time being, but as soon as it looks profitable will those banks roll in and open the taps again to get the oil flowing again? From my limited conversations with some guys at some US companies they have some aggressive plans.

[nik-]

And memories are short

[guzzy]

Originally Posted by Weitz

I bet you work at a producer.

nope, 12 years at EPC. Just started my own engineering/projects company. We operate quite differently than traditional EPC.

[BrownDrake]

Price is being supported by driving season, production shut-ins in the oilsands and the increased chatter of the Fed holding off on a June rate increase.

Its mostly about the USD as always. The Fed stays on hold expect WTI to hold strong, probably in a higher range ($45 to $55) until production resumes in the oil sands. If the Fed raises in June expect all commodities to sell off and after production volumes resume we see a lower range of $35 to $45.

[Husky]

Originally Posted by guzzy

I would disagree here. I think the technology is here. Alberta's problems are labour rates, plain and simple. We have a huge sense of entitlement. Some drilling companies are now putting modern rigs with staff out at $9k a day. I realize that is break even number but compare that number to two years ago and you will see a big problem. The drilling and service side of oil and gas is by far the greediest. Albertans need to learn to be efficient at every level if we want to be competitive - engineering, construction, drilling, service, operations. We need to make our selves better.

Fixed property taxes and surface rentals that kill economics of a well over its life.

[Bring_Back_Shantz]

Originally Posted by Husky

One of the biggest issue is property taxes and surfsce rentals. Costs are basically fixed and too high for todays economic reality.

Originally Posted by Husky

Fixed property taxes and surface rentals that kill economics of a well over its life.

Man, that's twice you mentioned that.
I have never seen property taxes or rentals that cause wells to be uneconomic.
They are usually such a tiny amount compared to overall operating costs that they almost get forgotten about.

Where exactly are you seeing operations where these costs are actually impacting economics?

[username]

Originally Posted by guzzy

Albertans need to learn to be efficient at every level if we want to be competitive - engineering, construction, drilling, service, operations. We need to make our selves better.

The greedy quote is a little over the top but the point is valid. When you have sales guys making a half million dollars a year selling pipe, as a distributor no less, you know the industry needs to be reset.

While very stressful on families and tough on everyone in the the short-term, this low price environment is, IMO, actually really good for the industry. When we get out of this companies will be much leaner and using capital more efficiently. Poor management (Penn West) will cease to exist and we will be competitive in almost any price environment.

Heck, even with a 40 dollar oil price, the best producers were CF positiive during Q1 this year.

[Reaper]

Originally Posted by Husky

Fixed property taxes and surface rentals that kill economics of a well over its life.

You would say that. You sold all your Southwestern Saskatchewan assets to Whitecap to pay less of them.