YW Mufc. I wish I listened to myself and exited all E&P after Thanksgiving 2014.
Its earnings season in the US right now and it is more than ugly. One of my core holdings - COP - reported and it was really ugly. Worst than that, they have rethought 2016 and expect it to be as bad or worse than 2015 (heaven help us). Slashed their dividend as well to preserve balance sheet.
Put these comments into whatever context you feel apply to SSN (my immediate thought is their continued reference to credit market tightening says MOB would be challenged to demonstrate that the loan they are extending is a good loan (for them). We'll soon see). Bolding is mine.
"...we have taken significant actions to reset the company in response to much lower commodity prices and tightening credit markets across the industry. These are two factors that have changed significantly in our view in a short period of time, and they have important implications for the sector, especially in 2016 and 2017..."
"...Second, we believe this downturn could last a while longer. Just a few months ago, we thought the market would rebalance by the second half of 2016. Now it looks like that can stretch into 2017..."
"...Regarding the credit markets, it's no secret that the credit rating agencies also see a likelihood of a weaker, more protracted downturn. Recently, Moody's and S&P have issued significantly lower price decks. The agencies have the industry under review for credit rating downgrades. Moody's has stated that multi-notch rating downgrades are likely and some have already occurred. The consequences of these downgrades are that debt capacity will shrink across the sector..."
My thought is if that is indeed sector wide it might just be that capital will simply not be available to be lent.
"...Our original plan anticipated 1% to 3% production growth in 2016. Now we expect flat production given these capital cuts. We're letting Lower 48 volumes decline,..."
The above were excerpts of the CEO's prepared remarks in the Q4 conf call
"...a consequence of the recent price drops has been that the credit rating agencies have become very pessimistic about future prices, and they are currently reviewing the industry's credit ratings using much lower forecasted prices. We should see industry-wide credit downgrades over the next couple months, with the potential for multi-notch downgrades in some cases. Across the industry, this is going to result in reduced debt capacity within given rating bands compared to just a few months ago..."
That was COP's CFO adding to comments of CEO Ryan Lance
It should be pointed out though that there is a big difference between a bond/note and Borrowing Base (BB). The BB is always the most senior debt. The notes are what the credit rating agencies review. So to SSN it may not matter. But the MOB it may well matter in that being a bank they would likely issue bonds to get capital to lend. And they may well reduce the amount they are willing to lend to the industry ... that might be the wild card.
Their EVP of E&P noted that their reduced pace of development & lower price decks led to only 10% organic reserves replacement (and -ve 19% after factoring in asset dispositions). So they are in reverse gear at present!
In the Q&A first question is essence was:
"But what changed in the last eight weeks? What were the primary changes that convinced you, one, that we were going to be lower for longer?
(RL): "...The world has changed, and there has been a dramatic drop in the prices. So we're seeing and enduring a much lower drop in prices. And as we look at the fundamentals, it looks like balancing probably is shifting to later in 2016 and possibly moving into 2017. So really it was the depth of the drop over the last eight weeks to two months combined with the duration, and the inventory doesn't seem to be flattening, let alone starting to drop off. And that combined with the last month of conversations that we have been having with the rating agencies, and clearly the debt capacity is going to be reduced."
and in relation to managing production
(RL):"...we're not trying to manage right now to a certain production level. We're trying to manage to the capital program that makes sense for the long-term value of the company, maintain our options, maintain the ability to ramp back up production. And production falls out of that. Production is what production is. I've said numerous times. We're not going to drill into this headwind. Deferral makes sense. It makes economic sense. We're just trying to set an appropriate capital level to meet the commitments that we have, manage the short, medium, and long term for the company, and production falls out of that..."
Definitely a case of battening down the hatches to survive the storm that's been raging for over a year and appears to be going to rage for another year. Bit late to shut the barn door... maybe catch 'em on the corral.
The transcript/webcast well worth a look.
GFTA
SSN Price at posting:
0.3¢ Sentiment: None Disclosure: Not Held
