Monthly Archives: February 2017

In the previous earnings season, I did an evaluation of majors' capital spending plans to find out whether offshore drilling recovery was around the corner (Part 1, Part 2). This time, I am returning to the topic and will look at majors' spending plans once again. The oil companies in question are Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Shell (NYSE:RDS.A), Statoil (NYSE:STO), Conoco Phillips (NYSE:COP), and Total (NYSE:TOT). Drillers available on major exchanges are Atwood Oceanics (NYSE:ATW), Diamond Offshore Drilling (NYSE:DO), Ensco (NYSE:ESV), Noble Corp. (NYSE:NE), North Atlantic Drilling (NYSE:NADL), Ocean Rig (NASDAQ:ORIG), Pacific Drilling (NYSE:PACD), Rowan (NYSE:RDC), Transocean (NYSE:RIG), Seadrill (NYSE:SDRL) and Seadrill Partners (NYSE:SDLP).

In my previous articles, I went through the majors' plans one by one. This time, I want to concentrate on big trends and key takeaways, in part because it will be easier to navigate for readers and in part because it is just boring to write in the same format once again. Below I provide links to earnings reports and subsequent earnings calls, so you can read them if you want to dig deeper into the topic.

Inflated stock prices favor short-term thinking. I would argue that some stocks have gone way ahead of themselves. The clearest example is Chevron:

There is no logical valuation reason why Chevron should be worth as much as it was in 2014, when oil prices were twice higher. However, there is a rational explanation to this phenomenon. Chevron stock price reflects the demand for yield. If the yield is good and market participants believe in its sustainability, the stock price increases.

Management surely understands the key driver behind the stock price. Not surprisingly, they want the upside to continue, which is favorable both for them and their shareholders. Thus, they prefer short-cycle projects over long-term projects because longer-term projects are an immediate hit on the bottom line, while the results will be seen later.

During the earnings call, Chevron said the following: "We're further reducing capital spending in 2017 and investing a larger percentage of capital in short-cycle high-return opportunities presented by our advantaged portfolio." The company added: "Our actions support our number one financial priority which is maintaining growing the dividend as the pattern of earnings and cash flow permit."

While the Chevron team was the most straightforward in discussing their vision, other management teams sounded similar. You can't blame them for this; they are doing what their shareholders are demanding, and they want the dividend, which is a primary reason for investing in oil majors.

The takeaway for the offshore drillers is that there is no change of short-term priorities for oil majors. Just like in the previous earnings season, the words "short cycle" and "dividend" are frequent guests in management's vocabulary.

Management teams sound more positive but still cautious despite the OPEC/non-OPEC deal. If you believe that OPEC/non-OPEC deal is a game changer, you'd expect that oil majors will be more focused on their growth plans. However, they appear to be more focused on their EPS or debt management, as highlighted by Exxon Mobil's intention to use excess cash balances to pay down debt or buyback shares.

In my view, nobody wants to get caught in a 2015-like scenario, when the rebound was followed by massive downside, which took oil below $30 at one point. The situation is certainly different now, but it appears as if oil companies want to play it safe and see confirmation that oil prices won't drop once again. So far, oil hit a wall around $57.50 for Brent (NYSEARCA:BNO) and was unable to gain more ground. The more oil spends below $57.50, the more chances for downside increase.

Maximizing project NPV takes back seat to the focus on low breakeven price. This is a huge shift in mentality, a one that is especially dangerous for offshore drilling. Almost everyone keeps talking about which projects they have that are breakeven at $40 per barrel or another low price. The last thing an oil major wants now is to commit to a perspective long-term project only to find out that the price dropped below the breakeven point.

I believe that it highlights the fact that there is not enough "belief" in OPEC in the system right now. Everyone wants to see if the cartel is able to provide long-term support and upside for prices. This is a rational business decision. Certainly, oil majors have no obligation or intent to bail out companies that provide services to them, like offshore drillers. However, one could have expected that there will be some movement toward fixing the present low dayrates for the long-term projects. But that hasn't happened so far.

The year 2017 will be as hard as 2016 for offshore drillers as oil companies' priorities have not changed. Without a dramatic upside in oil prices, any real recovery in contracting activity is postponed until 2018. Keep in mind that oil majors have to deal with dividends that are a legacy from $100+ oil times. Also, oil companies have no duty to think about the long-term balance between supply and demand.

Should demand overcome supply by a big margin sometime in the future, oil prices will skyrocket and oil companies will reap the benefits of higher prices and invest accordingly. I don't buy the typical argument that oil companies should be extremely worried about their reserve replacement and act now, employing offshore drilling (presumably UDW drilling). In my view, they have plenty of time and can increase exploration in a more favorable pricing environment.

I expect downside in offshore drilling shares if oil prices fail to continue their upside. The road to recovery is long, and if it does not start now with the help of higher oil prices, valuations will decrease accordingly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.

Read more:

Oil Majors' Plans - No Relief For Offshore Drillers - Seeking Alpha

BBC News

Director hits back at offshore worker blacklisting claims BBC News The managing director of a scaffolding business who has lost workers to the oil and gas industry has hit back at claims former offshore workers are now being unfairly blacklisted. BBC Scotland revealed on Monday that an MSP had passed concerns about ... Jobseeking offshore workers being discriminated against, claims MSPEnergy Voice all 7 news articles »

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Director hits back at offshore worker blacklisting claims - BBC News

Allison Jones, The Canadian Press

TORONTO -- Six years after Ontario abruptly imposed a moratorium on offshore wind projects, citing the need for more research, the government is signalling it will likely continue for several more years, even with all of its studies in hand.

The moratorium has so far put the Liberal government on the hook for at least $28 million, and it still faces a trial next year on another $500-million lawsuit over the February 2011 decision.

Both Windstream Energy and Trillium Power Wind had wind turbine projects planned for Lake Ontario in the eastern part of the province when the government brought down the moratorium -- in Trillium's case, just minutes before its financing was set to close.

Windstream took its complaint to a NAFTA tribunal, which partially ruled in the company's favour, awarding it $25 million in damages for unfair and inequitable treatment as well as $3 million in legal fees.

Ontario's decision was "at least in part" driven by a genuine concern about a lack of scientific research, but was also influenced by public opposition to offshore wind and how it could affect the Liberals in the upcoming 2011 election, the tribunal found.

"The government on the whole did relatively little to address the scientific uncertainty surrounding offshore wind that it had relied upon as the main publicly cited reason for the moratorium," the tribunal ruled. "Indeed, many of the research plans did not go forward at all, including some for lack of funding, and at the hearing counsel for the respondent confirmed that Ontario did not plan to conduct any further studies."

Five government-commissioned studies have been completed since 2011 on impacts on fish, other environmental impacts, sound and decommissioning requirements.

The studies largely found that while there were still many unknowns about offshore wind in freshwater environments, impacts were likely to be minimal. At least one concluded it was doable.

"If appropriate precautionary measures are taken to avoid or mitigate the impacts of potential harmful or disturbing activities, and implementation strategies are adapted to reflect an ever-growing knowledge base and accommodate the best available science-based options for mitigation, offshore wind power generation within the Great Lakes has the potential to be implemented with minimal impacts on the aquatic ecosystem and in an environmentally sustainable manner," concluded one aquatic research study.

The last two outstanding studies were made public in December, but now the government says it needs more research -- only, it hasn't commissioned any.

"Ontario will continue to follow the impact of North America's first offshore wind pilot project in Lake Erie -- a project authorized by the State of Ohio," the Ministry of the Environment said in a statement.

"Doing so will allow us to have a better grasp of any potential environmental and health challenges posed by freshwater offshore wind developments. The moratorium will not be lifted until research findings are understood and concerns surrounding offshore wind projects are addressed."

The Lake Erie project is slated to begin construction in the spring of 2018.

The Windstream contract in Ontario was signed at a time when the government was shutting down coal-fired electricity generation and looking for green sources of power. Now, the Liberal government is under fire for its green energy program, which is blamed in part for high electricity rates. It recently cancelled plans to sign contracts for up to 1,000 megawatts of power from solar, wind and other renewable energy sources.

But Windstream is still hoping their contract is honoured.

As for Trillium, its $500-million lawsuit for misfeasance in public office is set to go to trial one week after the June 7, 2018 election. Trillium doesn't buy the need for more research as an explanation for the moratorium, said its lawyer.

"These are all really, as far as we're concerned, simply excuses for not wanting to proceed with offshore wind," said Morris Cooper. "(This government) has no focus other than to win the next election."

The Liberal government is also under criminal investigation stemming from Trillium's claim. The company alleged in the lawsuit that government officials destroyed documents after the company sued over the government's cancellation of a Lake Ontario wind project and the provincial police are investigating.

None of Trillium's allegations has been proven in court.

In its statement of defence, the government says it was a coincidence that the moratorium and cancellations were issued just before Trillium's financing was set to close.

See the rest here:

Ontario signals extension on offshore wind project moratorium - BNN

Forbes

Don't Overlook This Cost-Effective Alternative To Offshore Services Forbes On a worldwide basis, companies are pausing efforts or taking a step back from globalization. In Europe, this is most evident in recent months with Brexit in the UK. In the United States, it is most evident in the proposals underway in Congress and the ...

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Don't Overlook This Cost-Effective Alternative To Offshore Services - Forbes

By Michael Bonner, mbonner@s-t.com

Clean energy advocates dropped A-list names at least in terms of American history Monday when discussing promoting a Massachusetts bill.

The 100 Percent Energy Act would make the state the first in the nation to commit entirely to renewable energy, the hope being others would follow the lead of the Bay State in producing a greener country.

Throughout our entire career as a community, Massachusetts has offered leadership to the world, whether it was John Winthrop ... talking about being light in the city on the hill or John Adams echoing him or John Kennedy echoing them," Sustainability Roundtable CEO Jim Boyle said in a conference call.

In January, State Reps. Sean Garballey, D-Arlington, and Marjorie Decker, D-Cambridge, along with State Senator Jamie Eldridge, D-Acton, introduced the bill, which now has 53 co-sponsors. It would require Massachusetts to source all of its electricity from renewable sources like solar and wind by 2035. Other sectors, like heating and transportation, would have to use renewable energy by 2050.

We know were not going to achieve 100 percent renewable energy overnight, Director of Environment Massachusetts Ben Hellerstein said. But we can make sure that every decision were making in the upcoming decade is going to make us that much closer.

New Bedford already took steps in that direction last week when Deepwater Wind opened its offices in the city. The ribbon-cutting ceremony of sorts included the mayor among others with the belief that the company will bring a plethora of opportunities to New Bedford in offshore wind energy.

Studies have shown that Massachusetts has the potential to generate 11 times the amount of electricity that fuel takes each year just from offshore wind alone, Hellerstein said. So theres huge potential, to supply not just Massachusetts but the entire New England region.

Last year, Environment Massachusetts released a report, which named New Bedford as one of the leading cities in the state marching toward 100 percent renewable energy.

Another study conducted at Stanford University predicted that 55 percent of the energy used in Massachusetts in 2050 could come from offshore wind.

It all leads to a predicted jolt in the local economy with innovative high-paying jobs.

Once the legislation is passed, we will pretty quickly begin to see real tangible benefits come to our communities, Hellerstein said.

The bill would also establish a council to identify opportunities for the workforce that would try to help erase the challenges that stand in the way of cities that were built on the dependence of fossil fuels.

Massachusetts has an almost unique opportunity to lead this technological revolution globally, Boyle said.

No timetable was provided as to when the bill could be passed. There was no concrete information regarding the total cost either.

In the short term the bill would focus on new construction. However, the panel acknowledged that most of the buildings and homes that will exist in 2050 are already built.

We absolutely will need to create programs and incentives to help folks in those homes make the transition, Hellerstein said.

Originally posted here:

Legislation could mean an economic boost in New Bedford offshore wind projects - SouthCoastToday.com