The Chinese symbol for crisis is composed of two sino-characters that can represent “danger” and “opportunity”. So which applies to the present state of the oil business? The answer is both.
The good thing about getting older is that nothing surprises you anymore. While the drop in oil prices may have taken everyone by surprise, it is of no surprise… that we were surprised. We have been here before. And while almost everyone has an opinion on when or if it will it recover, I do not. I can honestly say I have no idea what is going to happen.
Here is what I do know; this may be the best opportunity to enter the oil and gas business that I’ve seen in my career (my very, very long career). Sounds nuts right? Well let me explain.
BUY LOW. SELL HIGH. Any acquisition of oil and gas assets at this time will be based on the “current” price, not some price we wish it to be. If you look at crude futures you see March 2023 deliver at $68.26/barrel (+/-). Lenders will use the lesser of futures prices or even lower to fund exploration and production, but effective yield rates will be the same. Whatever the future brings, investing now at $50/barrel is much less riskier than investing at $100/barrel.
DEBT WILL CREATE A “BUYER’S” MARKET. From WSJ Aug 4, 2014: “The E&P sector in 2007 was carrying $28.84 of net debt per barrel of oil equivalent produced, according to data from IHS, roughly equal to operating cash flow. By last year, net debt per barrel had jumped 36% to more than $39, while cash flow was essentially flat.”
Even before the drop in oil prices, E&P debt was at an all-time high and has not decreased, but the drop in price has decreased the companies’ ability to pay debt. They will be forced to sell. Many of their leases have multiple pay horizons not yet exploited, and at current prices, little value. This creates the opportunity for future value, when and if prices come back.
HERE’S THE GOOD NEWS. There will be a lot of new capital coming into the oil and gas business to take advantage of this “buying” opportunity. New companies that no one has heard of, with capital from new sources, will enter the market with low debt/barrel ratios and therefore they will be more stable than their predecessors.
These companies will be shedding old methods and looking for new technology to create efficiencies and lower administration costs. Some will even begin using the “virtual” model, meaning there will be no “corporate” office in the traditional sense. They can now lean on a network of skilled and professional oil and gas personnel operating in the cloud. Technology will open up opportunities to hire the best and brightest, wherever they live. The company President can be located in New York, Geophysics, Geology and Engineering in Houston, Operations in Tulsa, Land in Dallas, and Land Service Companies all over the map.
Tim Supple – President – iLandMan