John White has initiated coverage on several small-cap exploration and production companies in the Permian Basin, the latest of the major basins to turn in a big way from vertical oil and gas wells to horizontal fractured wells. In this interview with The Energy Report, the Roth Capital Partners senior research analyst names five Permian players on his list of favorites.
The Energy Report: John, what are the main influences on oil prices today?
John White: We don’t believe what we are seeing with the oil price drop is a case of decreasing demand; what we have here is oversupply.
To give you some historical context, for the first hundred years of the oil and gas business, the industry drilled vertical well bores into what we call conventional reservoirs. Around 2000, advancements in horizontal drilling technology and fracture completion technology allowed the industry to complete strong wells in the shale formations, called unconventional formations.
The improvements in efficiency and productivity have led to an increase of about 3 million barrels a day (3 MMbbl/d) of U.S. oil production, off a base of about 6 MMbbl/d. In the last three years it’s been about 1 MMbbl/d each year. That’s 3 MMbbl/d the U.S. does not need to import from overseas oil producers, so you have more oil on the market. The market realized there was this surplus midway through 2014, and prices reacted to the downside.
TER: How are international developments, like a new king in Saudi Arabia and conflicts in Libya and the Middle East, affecting the West Texas Intermediate (WTI) price?
JW: The international oil price is what we call the Brent oil price, and the U.S. domestic price is the WTI price. International geopolitical events affect both oil prices, but tend to affect Brent more.
“The development of oil and gas mineral rights has been governed by the state authority. If there is a legal battle, the municipalities do not have precedent on their side.”
We are focused on the fundamentals of supply and demand, so we don’t have any extraordinary insights into the political dynamics within the Organization of the Petroleum Exporting Countries (OPEC). We try to stick with the numbers, although we do keep a close eye on Libya. Libya has been offline, online, offline at various times since the Arab spring of 2011. It’s certainly an influence. Libya has capacity of 1 MMbbl/d, but right now it is offline, and I don’t believe it is exporting very much oil.
TER: Resistance to hydraulic fracturing has been stiffening in Colorado, New York and even in Pennsylvania. How will that affect shale oil production?
JW: From the press releases and the news reports I’ve read of this resistance movement, it’s mainly municipalities that are reacting negatively to hydraulic fracturing. From an industry standpoint, the development of oil and gas mineral rights has, since the inception of the industry, been governed by the state authority. If there is a legal battle, the municipalities do not have, in my opinion, precedent on their side.
TER: As you know, Governor Cuomo in New York has said there’s not going to be any shale development at all in New York. Is that a major blow to the industry?
JW: I think it’s more of a blow to the residents and the workforce of southern New York, because they are on the border with Pennsylvania. Industry people tell me if you’re on the Pennsylvania side of the shale play, you see an awful lot of New York license plates because people are finding work in Pennsylvania and not in New York. Because state law governs development of oil and gas, the governor is within his authority to ban fracking. The Colorado and Texas state governments are much more pro oil and gas. They are enjoying such a tax revenue benefit from increased oil and gas production. I don’t think you’re going to get much pushback at the state level.
