Whiting Petroleum (WLL)

Analyst Note 07/07/2015 (Morningstar)

Crude oil prices fell almost 8% yesterday on the news that an Iranian nuclear deal was increasingly likely. This is a potentially significant development, given the economic sanctions that have reduced Iran’s oil exports by more than one million barrels per day (mmb/d) over the last few years. However, such volumes won’t come back immediately. Iran needs foreign capital and industry know-how in order to restore its production capacity. Further, it’s been estimated that services agreements with international oil companies could take up to a year to finalize. Best estimates are that 500-800 thousand barrels per day could be brought back online from the company’s underutilized oilfields through the end of next year. Further increases to the country’s oil production would require significant capital investment.

The lifting of Iranian sanctions is nonetheless a negative for crude markets, particularly in the short term as the industry is trying to get through one of the worst supply/demand imbalances of the past 20 years. Effectively, a ramp-up in Iranian exports would offset any near-term production declines stemming from the collapse in U.S. tight oil activity, which was expected to be a major source of relief given Saudi Arabia/OPEC have vacated their normal role of reducing supply to balance oil markets. Even without Iranian volumes, oversupply as of today looks likely to persist until the second half of 2016, albeit at less severe rates in the coming quarters. If 500 thousand-plus barrels per day of Iranian oil are brought online next year, imbalances could very well continue into 2017.

Whatever transpires on the Iranian nuclear front, our long-term outlook for oil markets is unchanged, as are our midcycle oil price forecasts of $75/bbl Brent and $69/bbl WTI. While we likely would raise our Iranian production forecasts (especially in 2016-17) if a deal were reached, this would not be material enough to change our marginal cost outlook.