Raymond James: $30 oil is worse than anyone expected

HOUSTON — Raymond James offered investors a stern warning Tuesday: $35 per barrel crude could mean a 70 percent collapse in cash flow for oil producers this year.

The investment bank’s bleak outlook means there could be plenty of pain in early 2016 for producers, who would need to make deep cuts to capital expenditures to stay afloat. But the drilling pullback could also drag the number of active rigs down even further, sending fewer barrels to market and ultimately sparking a sooner-than-expected rebound in prices, Raymond James analysts said.

“Investors are failing to recognize the fact that a $5 change in WTI translates into a massive ~20 percent change in U.S. E&P cash flows,” the bank’s analysts wrote in a note to clients. “2015 was a wasteland of low oilfield cash flows, spending and general activity levels, and 2016 is currently looking like it will be a whole lot worse.”

The conclusion was more pessimistic than most. Raymond James weighed figures such as commodity prices, forecast production, service costs and the number of financial hedges oil companies currently have — for both private and publicly traded companies — in its analysis.

Hedging, where oil companies lock in prices for crude in advance, helped to support cash flow during 2015. But few companies have locked in those high prices in 2016, and Raymond James estimated they could be getting as much as 40 percent less for their oil this year. Analysts also assumed a 15 percent annual reduction in cash operating expenses for both 2015 and 2016.

Much of the cash flow hit and E&P spending reduction will happen among closely held drilling companies, analysts said. The bank estimated that the large public companies it covered accounted for less than 30 percent of U.S. hydrocarbon production in 2014 and about 40-50 percent of the year’s capital spending.

“This leaves a significant portion of U.S. production and capex spend tied to private operators who tend to be less hedged and tend to operate at a lower efficiency when compared to our public E&P coverage universe,” the group wrote.

In total, capital expenditure cuts could reach as much as 70 percent from 2015 levels, a massive cut from already low budgets. Most industry watchers are predicting about 35 percent cuts now, Raymond James said.

The bleak prediction does come with some good news. The deep capital cuts would go a long way to balancing the currently oversupplied market. Raymond James is still projecting $75 oil in 2017 and has put its cash flows for that year at about 50 percent higher than 2015.

“We believe a massive recovery will take place,” analysts wrote. “These very low prices are unsustainable for more than a few quarters.”