April 23, 2015 / 12:05 AM / 4 years ago

CORRECTED-CERAWEEK-As drillers hunker down, Wall St sees quicker oil price bounce

(Corrects 2014 oil high in second paragraph)

By Jessica Resnick-Ault

HOUSTON, April 23 (Reuters) - There is a growing disconnect between Houston and Wall Street over when slumping oil prices will recover.

Beaten down by a seven-month rout that slashed crude prices from over $107 a barrel last summer to $42 a barrel, producers are bracing for oil to remain at about $60 a barrel for as long as the next five years or so, according to executives gathered this week at the industry’s biggest annual conference.

They are shedding staff and slashing spending because they reckon that prices will remain depressed.

“We’re lower for longer,” said BP CEO Bob Dudley.

But the financial community is already looking for the upside, buying up energy equities and plotting private equity acquisitions in a bet that the oil price cycle may turn more quickly than the industry expects.

“There is clearly a gap in view between the strategics and the financial community,” David Asmus, a Houston-based partner at global law firm Morgan Lewis, said on the sidelines of the IHS CERAWeek conference in Houston.

The perception gap is not necessarily unusual. Energy executives often take a more conservative view than investors or traders, who are paid to take more risk.

“Equity markets are already looking for the upside,” said Scott Key, chief executive of IHS. “They see a one-year horizon. The industry has always been more patient.”

But unlike in past years, the diversion of views has potentially significant implications for future oil prices.

After five years of informally targeting a $100 a barrel oil price, the Organization of the Petroleum Exporting Countries has abandoned efforts to manage the market with output cuts, leaving it to energy companies to reduce drilling and curb supply.

The speed and depth of that reduction, and the return to a new price equilibrium, will depend largely on what kind of prices executives expect in coming years.


Chief executives across the oil industry have said this week that they are planning austerity measures to weather a sustained period of depressed oil prices.

“One can hope for $75 oil but I think one has to plan for a lower price,” said Stephen Chazen, CEO of Occidental Petroleum Corp. Chazen said he was planning for oil to remain at $60.

His view was echoed by others at the CERAWeek conference, where CEOs from majors like BP Plc, Exxon Mobil Corp and smaller independents said they were preparing for prices to remain lower for longer.

Even one of the most bullish CEOs, Scott Sheffield at Pioneer Natural Resources, who plans to ramp up drilling this summer, expects crude to remain between $60 and $80 a barrel for five years.

Asmus noted that equities prices have already begun to recover, with shares of Pioneer up about 30 percent since December, outstripping gains seen in commodities markets. The Standard & Poor’s index of oil and gas producers has risen over 24 percent since February.

Private equity funds have begun to line up capital for acquisitions to get inexpensive exposure to the energy sector, as they perceive that crude prices will recover, Asmus said.

Two months ago, Blackstone announced that its second energy-focused private equity fund was oversubscribed, with interest beyond its $4.5 billion cap. The fund’s investors include pension funds, sovereign wealth funds, insurance companies, endowments, foundations and family offices, Blackstone said in a previous release.

“If all investors thought we would be in the $50s for three years, I don’t think there would be so much fund money piled up waiting for an energy investment,” Asmus said. (Reporting By Jessica Resnick-Ault, additional reporting by Terry Wade; Editing by David Gregorio)

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