There was a solid pop in oil futures Tuesday, June 23, with
August crude holding above $61.00 a barrel as the API and EIA supply reports
this week are expected to show tightening in domestic supply figures. Platts
polling data indicates an anticipated reduction of 2.3 million barrels amid
heightened tension between the U.S. and Russia, the world’s number two oil
producer, with U.S. SecDef Carter having announced a firm reinforcement of
Europe and massively increased logistical support to NATO’s rapid reaction
force, in order to face threats from the east or from extremists in the
increasingly deteriorating Middle East. Significant reduction in CAPEX over the
last several months by U.S. E&Ps of around 25 percent or higher, extending
through Q1 this year, has organized a groundswell in oil futures, which are
forecast to continue rising over the longer-term despite a stronger dollar.
Also, the continued moves by China and Russia to sign
landmark energy deals show a continued dedollarization of crude that threatens
to unseat the petrodollar. Massive potential investment in Rosneft’s (OTC:
RNFTF) huge new Vankor field in eastern Siberia by China and India is clearly
in the cards, with delegations from both countries having made recent visits to
Vankor and statements from Russia’s Deputy Prime Minister indicating that the
country has cleared a psychological barrier that previously prevented Russia
from giving China a measure of control over its hydrocarbon reserves. The
entire 440k BOPD output from Vankor is already being shipped out to feed Asia
via the ESPO pipeline, with the vast majority of output ending up in
northeastern China.
In this near-term environment of reduced upstream activity
among domestic E&P operators, the larger sector players stand to do best, because
they have the kind of geographical and infrastructural diversity, economies of
scale, widespread exposure and overall size needed to survive and thrive. The
impending Halliburton (NYSE:HAL)-Baker Hughes (NYSE: BHI) merger and other such
consolidation in the sector is a clear indicator of the underlying market
dynamics here and it is also a key expression of the sector finding its
footing. In fact, Denver-based Markwest Energy Partners (NYSE: MWE), which
derives much of its operational cash flow from fees, has established agreements
with more than 160 producers, roughly 4.7k miles of pipelines and around six
billion cubic feet per day in natural gas processing capacity, is actually
firmly focused on growth. With as much as $1.9 billion in CAPEX lined up for
this year alone, across 20 major projects that are currently under construction
on over nine million acres throughout the country’s top producing basins in
Texas, Oklahoma and the northeast (emphasis on the Marcellus shale), Markwest
is even on track to do four major plant expansions in Ohio.
For a company like energy-related EPCM (engineering,
procurement and construction management) and automation specialists ENGlobal
(NASDAQ: ENG), which is one of the most well-positioned and top-ranked
providers of full spectrum services in the field today, the aforementioned
market dynamics are good news. Because in order to thrive in this arena,
especially under the current conditions, a reputation for excellence and the
ability to deliver on time and within budget is paramount when it comes to
attracting business from the biggest players. A long, established track record
of success with top sector players will serve ENGlobal well in helping to
further court the business of those energy sector juggernauts which are most
able to withstand the temporary slowdown in capital expenditures, as well as
the smaller contrarians who are shrewdly doubling down into the sector nadir.
Even with the downturn in energy commodity prices having
impacted ENGlobal’s overall upstream related orders in Q1 this year, the
company has maintained profitability, with a strong working capital position of
over $24 million, and zero borrowings under their current credit facility.
Automation operating profit margin outpaced the company’s EPCM division during
the first quarter of 2015, posting a still healthy 13.9 percent, whereas
engineering and construction profit margins were on par with Q1 2014. This is
thanks in large part to the company’s vast expertise in both automation
integration and automation engineering. ENGblobal’s ability to deliver a full
range of integrated process, power and control solutions, handling everything
in-house from the fabrication, assembly and programming, to documentation and
system testing, has helped win the company a reputation as a rock-solid
reliable supplier of integration solutions.
By being able to provide integration support ranging from
analytical units like continuous monitoring, analyzer maintenance and data
acquisition systems, to custom industrial HVAC (heating, ventilating,
air-conditioning) systems and hydrocarbon moving infrastructure, like pipelines
and rail/truck or sea terminals, ENGlobal has firmly cemented itself in the
minds of some of the industry’s biggest companies as a provider who can handle
anything that is thrown at it. Other automation integration systems provided by
the company include a vast array of power solutions, like switchgear shelters
and micro-turbine power islands, as well as complex control systems like master
panels, burner management systems, SCADA (supervisory control and data
acquisition using coded signals) controls, and fire/gas protection systems.
The company actually specializes in the kind of robust
modular enclosures needed for everything from general operator shelters and
control rooms, to heat and blast resistant cabinets used in some of the energy
industry’s most dangerous environments, such as refinery process units and on
drilling rigs. Far more than just a successful integrator, ENGlobal can design,
fabricate, manufacture and fully test the kinds of highly modular, fully
integrated control cabins that are ideal for today’s most advanced automated
drilling rigs. A highly experienced automation staff with years under their
belts, doing everything from DCS (distributed control system) migrations, plant
re-instrumentations and complete expansions, to customized electrical, control
system and instrument initializations, stands at the ready to help the
company’s clients.
By providing everything from commissioning and process
control start-up support, to power distribution and generation, as well as loop
check, complete analytical verification and even EPA-regulated system
automation services, ENGlobal is able to stay profitable and attract new
business, even when times are tough in the industry, maintaining profitability
on the strength of reputation and a diversity of offerings. It is this capacity
to deliver automation and control system services that span the gamut, covering
almost any task imaginable, from conception through to execution, which will
continue to make the company attractive amid further industry consolidation as
we potentially head towards a more lively sector rebound sometime in mid to
late 2016.
Research and investing information provider Cowen & Co
analysts are projecting small to mid-cap E&P’s are in for some rocky
terrain next year, with a $16 billion shortfall between cash flow projections
and spending estimates, requiring some $8.6 billion in order to meet production
growth projections for 2016. This reality will continue to fuel M&A
activity within the sector and for companies like ENGlobal, an ability to court
the biggest players will be a deciding factor, whether the work is at home or
abroad.
Significant domestic tightness in crude supply over the next
two months into July and August, driven by increased drawdowns like those we
have seen over the preceding seven weeks, but clocking in at as much as eight
million barrels per week, could push crude to over $70 a barrel according to
recent analysis from OptionSellers. As Americans increasingly hit the roads for
the peak of driving season, associated draws in secondary products like
gasoline should also rise, putting even more wind in the energy market’s sails.
This price activity could seriously pan out longer term as the true impact of
the recent, dramatic reduction in upstream activity like new well starts
becomes more and more obvious. New well starts were off by 105 percent compared
to last year in May, down to 1,761 from 3,625 according to RigData. A trend
tracked by permits, which were also off substantially from the same period last
year, showing a 75 percent reduction from 2014, to around only 898 in May.
People keep talking about a supply glut, but unless upstream activity picks
back up to levels seen before the crude price crashed in late 2014, supplies
could dry up quickly and ignite a bull market in E&P capital expenditures,
as we scramble to meet demand without having to return to a paradigm dominated
by OPEC exports.
Dig deeper into ENGlobal by visiting www.englobal.com
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