Steve Pruett has seen more than his share of booms in three decades in the oil business. None, though, as strange as the one gripping the Permian basin right now…. “Oil men are innately optimistic,” he said, “and sometimes our optimism is our own worst enemy.”…By this point, “we’ve given up all of our profit margin,” he said, referring to the industry. “We’re over-capitalized, we’re over-drilling and, if prices don’t rise, we might be facing a double dip in drilling.” […]
Pruett’s comments are eerily reminiscent of Tom Ward’s earlier cavceat. Ward, co-founder of Chesapeake Energy, told CNBC’s Squawk Box in a May 2016 interview, “In our business, the dirty little secret is you can’t really spend within cash flow and grow production”.
These comments from high level upstream executives seem to have gone unheeded. It’s as if everyone already knows that more money goes in than comes out, but few people actually care. The “party must go on” attitude is definitely indicative of a bubble.
These sentiments are sufficient to give me pause. In my own research, I have consistently noted the economic disparity between marketplace values of upstream debt and equity, and operators’ abilities to earn cash profits at $50/bbl and below. Every time I look at this issue, I point to the same underlying cause: capital which was made too cheap by central bank machinations resulted in an unintended investment bubble.
The energy bubble has been a net positive for North American economies in the short-run, and it has exposed pervasive weakness in OPEC’s ability to set prices. However, it has also come at huge expense to investors. I suspect it will also have more unintended consequences further down the road.
Article Source: Dan Murtaugh. In Permian basin, jitters mount that a bust is near. World Oil. 25 Sep 2017. Original content accessible: http://www.worldoil.com/news/2017/9/25/in-permian-basin-jitters-mount-that-a-bust-is-near
Updates to the Read List are meant to keep readers informed of stories and analytical highlights from third party sources that I find particularly relevant and worth sharing. Content that was recommended prior to 2017 is accessible through the Read List Archives.