By Andre Gafford, Sr. Partner, DeLeon Business Consulting Group
Born and raised in the south gives me a different perspective on things. Call it a southern frame of reference. I know that a hit dog will holler, which means if a person is offended by something someone has done they will tell that person. I have always been taught not to take any wooden nickels because they don’t spend. That was a reminder to be cautious in all business dealings. I know that a room’s size can be measured by the distance it would take to scream at the family pet. I know the best indicator of a storm is your body. An older southerner can tell you that a storm is coming based on the pain in their knee. Some southerners have learned to literally taste or smell the rain. This technique comes when you have a keen understanding of your surroundings. You can tell when some forces have changed the temperature, wind, humidity and smell in the air, or the sweet flavor that you find once you lick your index finger and put it in the air. To a southerner, those are clear indications that a storm is on its way.
I have tasted the air and I can promise you one thing, there is a storm brewing. The storm I speak of is in the oil and gas industry. Be mindful that a storm is not always a bad thing. To a town that is suffering from drought, a storm is a welcomed occurrence. Such is the case for the oil and gas industry with the drought being the drop in oil prices. We are all aware that in 2015 the price of oil started a historic decent from USD $114 to USD $28 a barrel. The ripple of that storm could be felt in almost every industry. Manufacturers, wholesalers and service companies all shriveled like grapes on a vine. Oil companies were forced to learn to work smarter and do more with less capital and employees. Now, we fast forward to 2017 and the conditions are right for another storm. Prices first stabilized and are now rising.
The first indicator is the change in guard. The US has a new President; a new Secretary of State that is the former Chief Executive Officer of Exxon Mobile; and the US Senate confirmed Scott Pruitt, Oklahoma Attorney General, as US Environmental Protection Agency administrator. Another ingredient to the coming storm is the OPEC (The Organization of the Petroleum Exporting Countries) agreement that was reached in November 2016. OPEC has agreed to cut production by about 1.2 million barrels per day or about 4.5 per cent of current production. This is the first time production had been cut in eight years. The OPEC deal is huge because it is the major contributing factor to the price freefall.
Oil companies are watching these things unfold and the oilfield battle cry has been sounded. Drill Baby Drill! Baker Hughes Rig data states that US rig counts have almost doubled from 316 in 2016 to 602 as of February 24th, 2017. Raymond James & Associates Inc. anticipated the average US rig count in 2017 to hit 850 rigs and 1,100 in 2018. If that’s not a storm, I don’t know what is.
With surges like these you can guarantee there will be a bottleneck. During the price slump many service companies went belly up. The companies that are left will see a rise in demand for their services that will allow them to raise prices and recoup some of those losses. Manufacturers beware! This storm is still based on efficiency. New more efficient technology will be in high demand and will command larger prices. Producers have done a lot of work to get margins high enough to operate. They don’t yet have an appetite to completely give those gains away. But rest assured, if these trends continue, producers, service companies and all associated companies will be waist deep in profits from a storm that will reshape the oil and gas industry.