FORT WORTH, Texas—Polymer companies that have a heavy emphasis on supplying shale oil and gas wells will be hurt the most by the ongoing price war that has seen oil prices plummet to around $30 a barrel or lower.
That's because the shale players—particularly the smaller companies—can't sustain future investment in new wells at these prices, according to Neil Mendes, CEO of Alpine Polytech, a Fort Worth-based material and equipment testing firm, and also chair of the Energy Polymer Group.
The price drop involves Russia, Saudi Arabia and other geo-political forces that have seen oil selling at levels it hasn't seen in the last five years. Basically, the Russians hiked oil production, he said, to try to hurt shale producers and reduce producers' footprint in the market, while the Saudis, unhappy with Russia not sticking to agreed-upon production limits, boosted production as well.
It's a bit like what Saudi Arabia tried to do in the 2014-16 timeframe, but with some financial twists. "The difference potentially is these (shale) companies do not have that much cash," Mendes said. "They're operating on fumes to begin with, and this oil price down to $30 a barrel is not sustainable for a lot of them."
The economics of shale and off-shore oil production plays a big role in how the whole situation is playing out. First, shale wells are easy to turn on and off, unlike the massive rigs erected offshore that cost billions to put in place. Mendes said once those rigs are in place, the actual price to produce a barrel of oil probably is less than $15 a barrel, discounting the upfront costs.
"So once they're going, they're cheap," he said.
But for shale it's a whole different story. Even well-run companies break even around $40 a barrel to produce oil from the shale wells. "And they have to constantly drill wells, because they only last for a few years, in order to get oil out of the ground," Mendes said. "At $30 a barrel, they're losing $10 a barrel from break even. There are a lot of shale companies that don't have the cash to even operate basic drilling and completion of (new wells). Whatever they have in the ground, they can pump it, because they've already spent most of the money, and create some cash flow. But they can't replace that. They just don't have the cash, and there's just no money out in the marketplace."
And prior to the last month or so when the coronavirus pandemic began to have a greater impact on the world's economy, he said the oil and gas sector was by far the worst performing sector in the stock market—shale in particular and oil and gas overall. "The returns are terrible, and that's when prices were $50 a barrel (or higher)," he said.
Even oil industry giants such as ExxonMobil and Shell were not performing anywhere near the rest of the stock market. And shale players were much worse off.
"They constantly need cash," Mendes said. "They're not generating enough free cash flow to really give a return back to investors."