COVID oil crash may put pressure on the ASX's US frackers

US oil companies are being besieged by OPEC and Russia, which are again seeking to break the back of American shale.

And as markets tumble around the world, the term ‘cash is king’ is making a comeback, which may put pressure on ASX small caps with oil exploration and production operations in the US.

Stockhead understands that small cap brokers are preparing to be hit with a wave of capital raising requests in the next few weeks, as companies try to ensure they have the requisite two quarters of cash on hand ahead of the April 30 quarterly report deadline, and as those with stretched budgets are forced to raise money to cover an uncertain future.

According to Stockhead data, there are 16 small caps with oil operations in the US.

Of those, December quarter data indicated two were planning to spend more in the March period than they had left in the bank (see table below).

Abilene Oil and Gas (ASX:ABL) however expected monthly profit payments to begin from its joint venture with Lodestone Resources, subject to capital spending on new drilling targets.

Fremont Petroleum (ASX:FPL) had just under $3m in debt available to tap.

Four did not have enough cash to cover spending plans over two quarters.

Code	Company	Receipts Q2'20	Cash Q2'20	Expected spending Q3'20
88E	88 ENERGY LTD		$15,903	$1,845
ABL	ABILENE OIL AND GAS LTD		$27,000	142,000
ATS	AUSTRALIS OIL & GAS LTD	US$10.3m	US$16.1m
BRK	BROOKSIDE ENERGY LTD	$464,000	$1.2m	$425,000
BYE	BYRON ENERGY LTD	US$6.6m	US$20.7m	US$8.1m
EEG	EMPIRE ENERGY GROUP LTD	US$1.3m	US$9.9m	US$3m
E2E	EON NRG LTD	US$786,000	US$2.5m	US$340,000
FPL	FREMONT PETROLEUM CORP LTD	$205,000	$76,000	$2.5m
HE8	HELIOS ENERGY LTD		$5.2m	$2m
OEL	OTTO ENERGY LTD	US$7.9m	US$25.7m	US$14.5m
PSA	PETSEC ENERGY LTD	US$141,000 (revenue)	US$2.4m
RMP	RED EMPEROR RESOURCES NL		$5.1m	$350,000
SHE	STONEHORSE ENERGY LTD	$52,000	$2m	473,000
WBE	WHITEBARK ENERGY LTD	$561,000	$5.1m	$2.3m
WEL	WINCHESTER ENERGY LTD	US$767,000	US$5.4m	US$3.9m
XCD	XCD ENERGY LTD		$2.7m	$1.6m

Raising capital in Australia’s beaten up market may still be easier than in the US.

Wood Mackenzie corporate upstream vice president Tom Ellacott said earlier in March that raising capital in the US was much harder now, and low merger and acquisition activity made finding a buyer difficult.

He was expecting bankruptcies among the more indebted companies.

Who can and can’t break even

With oil prices under $US30 ($52) a barrel, an added pressure is whether companies which require a higher break even price can survive.

Shale wells need to be fracked to extract oil, a high-cost process, and unlike conventional oil the flow rates start high but quickly decline.

Fracking is a process whereby water is shot down a well to crack open fissures in the rock. The water contains particles such as sand which prop the cracks open, allowing oil and gas to flow out. US companies managed to get the process cost down significantly during the last oil price crash in 2014-15.

Late yesterday the US oil benchmark WTI was trading just under $US23 a barrel. The northern Europe benchmark Brent was trading around $US26 a barrel.

A year ago Stockhead analysed available data and found that at $US50 a barrel ASX-listed US oil companies would be fine.

But last week energy market researcher Wood Mackenzie found that at a Brent price of $US35 a barrel, 4 per cent of global production was uneconomic. At $US25 a barrel, 9 per cent is uneconomic.

“The industry’s ability to keep higher cost barrels flowing will be severely tested. Longer-term, the impact of a lack of spend on maintaining existing production and capital spend to replace declines will take over as the primary driver of supply,” it said.

Too much oil, too low prices

The issues that are shaking the US oil sector are oil prices and a supply glut.

Oil prices tanked earlier in March when Russia refused to rejoin an OPEC accord to continue reducing production levels as a way to control global prices.

Russia was taking aim at US shale oil companies, which have been gaining oil market share at its expense as the OPEC+1 cartel, of which Russia is the +1, tried to stabilise global prices.

Saudi Arabia retaliated by ramping up production, which caused the accord to cut production to collapse.

The other issue is the massive ramp-up in production into a period of low demand, after the world’s biggest buyer China shut down its industrial sector to cope with the coronavirus pandemic and as the rest of the world follows suit, which has resulted in a supply glut.

The International Energy Agency expects appetite for oil to fall by about 90,000 barrels per day in 2020 compared with last year. This is the first time demand has fallen since 2009.

IHS Markit data suggest the surplus could reach between 800 million and 1.3 billion barrels by the end of June.

BoFA Global Research last week estimated spare global storage capacity was 900 million barrels.

Reports from Reuters say oil majors such as Shell and BP are storing jet fuel at sea, a highly volatile mix that degrades in quality quickly, and the supply glut was ramping up before the wave of oil from Russia and OPEC has hit the market.