My Take - Part 2As I stated in my previous articles, it may be a while before WTI starts to recover over the short term, but it will recover over the long term. Twin Butte can withstand $63.5 oil for 2015 with a 50% of current CAPEX guidance while maintaining the dividend. (I have modelled every conceivable possibility, and with $63.5 oil - they bring in over $85M on just their hedges alone). Below $60 for 2015 is where things may get a bit more problematic. They may be ok for 2015, but in 2016 with no hedge protection, even if prices increase, if they are forced to cut CAPEX in 2015, they will have lower production in 2016 which will really slow growth and create strain to fund CAPEX and dividend. Management needs to accurately forecast where WTI is headed, and base the budget accordingly in a world where no one has a clue where WTI is going. Tough task indeed. Cut CAPEX too much, you're safe for 2015 but if prices slowly recover, you risk longer term recovery in 2016 and beyond. Cut CAPEX too little, and you risk higher payout, D/CF if prices remain low for the current year.
Long and short, in my opinion, they can wait this out. LTS, SGL and others with high debt, are going to have a rough volatile ride. That doesn't mean TBE will not drift lower. It is likely to test $1.00 or lower in the coming weeks with limited upside on WTI. Short term upside catalysts for WTI include:
a) A continued trend of reduced inventory levels (this will play out over 3-4 weeks to establish a trend). This will occur if refining utilization rates hover around 93% as it did last week.
b) Continued downward revision in drilling permits (which dropped 40% in a very short period of time)
c) Continued downward revision in rig counts.
All these will take a few weeks/months to play out, at which time - WTI may test $60 .
But make no mistake, the scale back in US shale growth in my opinion has already begun. Although experts are calling for production to increase in 2015 by 500,000 to 1,000,000 boepd in the US - it's complete nonsense in my book. I think the US is telegraphing to the Saudi's on major media outlets (ie. Bloomberg, etc) to "bring it on" in typical American bravado fashion, but numbers simply don't lie. Even if producers can find profitable shale at $25-$60 boe, they can't raise more debt given current junk bond status (because their underlying reserves have now been devalued), so they can only fund new drilling through organic growth or slashing costs (ie. Dividends, CAPEX). They can’t raise new equity when prices are at all-time lows without ridiculously diluting their shares With lower oil prices, they simply won't have the cash flows, and hence CAPEX to drill. With decline rates, things will start to reverse quickly in my humble opinion. I'm not guessing where WTI will be next year, but based on just the economics, my guess is it will start to move higher by 2H 2015.
By then, all the experts will come out with the new headline "US Shale growth dramatically reduced by X%" or "the slow death of the US Shale industry"....again - it's all headlines. The task for any investor is to cut through the garbage, do your own homework, come up with your own thesis, and invest.
In the meantime, I personally feel Saudi is going to sit on the sidelines and let the market play this out exactly as they have said. They have nothing really to lose. They keep market share. They hurt adversaries (ie. Iran, Russia). They slow US Shale growth. I mean - they are in a very VERY good spot relative to other global producers.
I will say it again, take some off the table, if this drifts lower - you can buy on the dips. Until management releases guidance on revised assumptions likely in January, there is limited upside news or catalysts to TBE (but for us long term investors - that's irrelevant - it's very hard to catch a falling knife as you've heard before).