Oil companies faced with hard questions as prices continue to sink

Questions have been raised about the future of oil and gas companies struggling with low prices brought about by poor demand and the lack of storage capacity.

The benchmark West Texas Intermediate contract for June delivery appears set to follow the earlier May contract into negative territory with prices currently trading at about $US16.54 ($25.86) per barrel while the larger Brent Crude benchmark is currently at $US21.70.

And there doesn’t seem to be any relief in sight with demand in the doldrums thanks to the impact of the COVID-19 pandemic, excessive production resulting in storage at the key crude oil hub in Cushing, Oklahoma, being either full or spoken for, and recent production cuts agreed by major producers seen largely as being inadequate.

Oil majors are in danger of haemorrhaging cash at current prices and they are faced with choosing whether to cut dividends paid to shareholders, which have typically being guarded carefully, or cut project funding.

Supermajor ExxonMobil has already taken on an additional $US18bn in debt while Shell has added $US20bn to its debt ledger.

READ: Services companies are the hidden victims of the oil crash

The story for junior oil and gas companies, which typically do not have the deep pockets of their giant peers, may be bleaker, though gas-focused producers with long-term contracts may be in a somewhat stronger position to weather the storm.

Oil’s fall could also represent an opportunity for the renewable energy sector with some speculation that it could push oil majors towards becoming greener (and less sensitive to oil price movements).

ASX small cap energy companies

Alaska-focused 88 Energy (ASX:88E) has made an all-scrip off-market takeover offer for fellow North Slope explorer XCD Energy (ASX:XCD) in a bid to increase its footprint in the US state.

The offer of 1.67 88E shares for every XCD share values XCD Energy shares at 1c each, which represents a 102 per cent premium to the 30-day value-weighted average price of XCD’s shares.

XCD says it is currently giving careful consideration to 88 Energy’s offer and advised its shareholders to take no action until it made a formal response to the offer.

88 Energy has not had an enjoyable time recently, with UK company Premier Oil pulling out of their joint venture early this month after the Charlie-1 appraisal well intersected gas condensates rather than oil.

Meanwhile, Strike Energy (ASX:STX) and Warrego Energy (ASX:WGO) have secured approval for their upcoming appraisal drilling campaign at the West Erregulla gas field in Western Australia’s Perth Basin.

The joint venture will now finalise procurement of a drilling rig and incorporate the addition of the West Eregulla-4 well to the previously approved West Erregulla-3 well.

Drilling is expected to start in the third quarter of 2020 and also includes the contingent West Erregulla-5 well.

Strike’s West Erregulla-2 well is credited with proving that the producing Waitsia gas field is not the only major resource in the Perth Basin, after it flowed 69 million cubic feet of gas during testing.