West Texas Intermediate crude oil prices gave oil companies a scare on Tuesday after dipping below $30 per barrel for the first time in more than 12 years.
The record low prices sent stocks downward and although crude oil prices managed to stay above $30 per barrel on Wednesday, experts say short-term prices do not look good.
"Anything below $30 per barrel, is too horrible to contemplate," Tunstall said.
Nonetheless, the San Antonio Business Journal discussed what life would be like below $30 per barrel with Tunstall, who sees an industry in "shell shock."
"I hate to deliver bad news as much as anybody," Tunstall said. "People have a tendency to shoot the messenger but it is what it is."
Low Crude Oil Prices
Analysts with the U.S. Energy Information Administration reported on Wednesday that crude oil prices is expected to remain low through the third quarter of 2017.
EIA estimates that global oil inventories increased by 1.9 million barrels per day in 2015, marking the second consecutive year of inventory builds. Inventories are forecast to rise by an additional 700,000 barrels per day in 2016, before the global oil market becomes relatively balanced in 2017.
Tunstall told the Business Journal that he does not see any major improvement to crude oil prices until the global glut ends and that may take years.
"In the 1980s, it took 10 years to work its way through the system," Tunstall said.
With economic sanctions against Iran lifting in the first quarter 2016, the Middle Eastern nation has an estimated 30 to 40 million barrels worth of oil sitting inside tankers docked and ready to go along its coast.
Iran is expected to start delivering 500,000 barrels of oil per day in the first six months after sanctions are lifted but Tunstall said it is expected to finish 2016 exporting at least 1 million barrels of crude oil per day.
Because oil is cheap to produce there, Iran is not interested in high prices and like Saudi Arabia, wants to maintain a high percentage of the global market share, Tunstall said.
Meanwhile, all eyes are on China but their demand for crude oil has slowed down and is not expected to grow in 2016.
"I'm still waiting for the truth to come out of China," Tunstall said. "They've cut back on aluminum and other commodities. They same thing is likely to happen to oil."
Less New Drilling
Tunstall said to expect less new drilling while capital for new oil field projects is expected to become tighter below $30 per barrel.
"Companies with their own cash will have to use it," Tunstall said.
Tunstall said oil producers in the Eagle Ford could shut off their wells to correct the supply problem but many companies need to fulfill lease obligations while others need to keep their cash flow going and provide debt service.
"Capital intensive projects will be canceled or deferred until later," Tunstall said.
Meanwhile, Tunstall said those with cash can scoop up assets at bargain basements.
Pioneer Energy Services (NYSE: PES) started last year with 62 drilling rigs but sold 32 of them. With the deployment of four new state-of-the-art rigs, the San Antonio-based company now has 34 of them in their drilling fleet. In a move that now looks like either a stroke of good luck or good timing, Pioneer also renegotiated its revolving credit with 10 banks in December.
San Antonio-based Abraxas Petroleum Corp. (NASDAQ: AXAS) has not turned a profit since the fourth quarter of 2014. but CEO Bob Watson said during a third quarter earnings call that the company can weather low crude oil prices.
Abraxas is using hedging to lock in oil prices at above $84 per barrel through 2017 and will not be doing any new drilling in the Eagle Ford until West Texas Intermediate crude oil reaches $65 per barrel.
Bankruptcies
With many price hedges already expired or set to do so, many companies could soon be at the mercy of market prices.
Tunstall said companies with highest debts have the most to be worried about at life below $30 per barrel.
Last year, the Business Journal reported on companies like Royalty Partners, Segrest Saltwater Resources, Tomahawk Resources, GasFrac and Primera Energy filing for bankruptcy.
Although the Texas oil industry has survived previous downturns, Tunstall said the speed of the current price drop is causing turmoil. He expects to see even more bankruptcies if crude oil prices take a sustained dip below $30 per barrel.
"The shakeouts that we saw last year are just a precursor to the bloodbath that we'll see in the first half of this year," Tunstall said.
Refineries & Consumers
Not everything is doom and gloom below $30 per barrel, refineries and consumers are expected to benefit.
Gasoline consumption remains high and lower crude oil prices mean lower input costs for refineries.
Both Valero Energy Corp. (NYSE: VLO) and Tesoro Corp. (NYSE: TSO) reported record prices in 2015.
Tesoro reached the highest stock price in the company's 48-year history just a couple days before Thanksgiving.
In a report released last week, analysts with the on-line service GasBuddy predict that gasoline prices will remain low for 2016 saving consumers cash at the pump.
Refineries in Texas are expected to benefit even further from low crude oil prices due to pipelines and proximity to shale oil fields. South Texas refineries seem poised to take advantage.
Calumet Specialty Products Partners LP owns a refinery in south San Antonio while Blue Dolphin Energy Co. (OTCQX:BDCO) owns one an hour to the east in Nixon.
Valero owns refineries in Three Rivers and Corpus Christi where Flint Hills Resources and Citgo also own refining facilities.
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