The looming OPEC-US oil war has reported its first victim, with ASX-listed US-based shale oil operator Red Fork Energy Ltd (ASX: RFE) entering into receivership on Wednesday after it was unable to secure additional funding to cover its high debt load.
It's a stark, painful reminder of just how little control junior commodity producers have over the market in which they sell their product. While oil hovered around $100 a barrel and iron ore around $100/tonne, all was right in the world.
But as markets tighten and get more competitive, investors are figuring out just how vulnerable they really are to commodity movements – and just how much of a practical limit there is to cost cutting.
BC Iron Limited (ASX: BCI) has done remarkable work recently, returning its mines to profitability after reducing staff numbers and trimming costs, but this kind of streamlining has a practical limit and should the price of iron ore fall below $60 the company will find itself straddling the knife edge.
The situation is worse for shale oil producers, who – having only established operations in the last five years or so – often labour under greater, more expensive debt than more mature conventional producers like Santos Ltd (ASX: STO).
With organisations like OPEC controlling a considerable portion of global production, Australian oil producers are entirely at the mercy of the big players – although our larger producers can sometimes negotiate more favourable contracts.
A weaker Australian dollar, which Reserve Bank governor Glenn Stevens wants to see worth around 75 cents US, would be a plus to producers, but junior companies are still going to struggle to capitalise their projects and deliver returns to shareholders like they have in recent years.
With all the uncertainty around pricing and OPEC's apparent preference towards a scorched earth policy, I doubt if Red Fork Energy is going to be the last casualty of global oil markets.
