WHEN OIL DROPPED below $30 a barrel in mid-January, the petroleum industry went into a panic. The question I heard most often was - What is the floor? How low can it go? Pundits were everywhere with their answers - $25, $20. Some thought lower. More gloom and pessimism were setting in.
The next week, oil rose above $30 to about $33 - only a few bucks higher than the previous week - but the industry was elated. Are we on the march to $40 or even $50 oil again? Hallelujah.
Yes, oil prices have been on a roller coaster, but calm down. Put the Valium back in the cabinet. Stay away from open windows, especially if your office is higher than the second floor. Have a cup of hot tea or maybe a toddy for the body - it will help you think more clearly.
Now is not the time to panic. In fact, it's never a good time to do that. If you should have been better prepared for low prices, there's not much you can do about it now. Just be thankful you don't live in Syria. Your sinking investments pale in comparison to what those poor people are going through.
Let's see if we can find some good news to cheer you up. Ah, here's an item that might work:
Conditions look fairly positive for the private equity guys and those with capital to invest. One man's loss is another man's gain, right? Houston's own Will McMullen, whose private equity firm invests in small upstream companies, told OGFJ recently, "Without exaggeration, I believe 2016 will provide generational buying opportunities for companies like Bayou City Energy (his firm)." So if you don't already have a private equity firm, you should think about getting one.
Okay, I'm looking through my in-box for positive items...I know there must be another in here somewhere. Moody's Investor Service says "Worldwide oil glut will strain upstream and services companies through 2018" - No, that's not it. The Houston Business Journal headline reads "Energy sector will be a 'bloodbath' in 2016" - No, that's not what I was looking for either.
Ah, here it is in the Houston Chronicle: "Economist says Texas oil drillers may have unlocked crude supply lasting 'decades into the future.'" That's good news, isn't it?
Karr Ingham, a petroleum economist who compiles and analyzes information for the Texas Alliance of Energy Producers, says that despite massive cutbacks Texas probably broke a decades-long record for crude oil production in 2015. He says the Lone Star State produced an estimated 1.267 billion barrels of oil last year, likely breaking a 43-year-old production record and securing our state's position as the top oil producer in the USA. Yay for us! We're No. 1! We're No. 1!
Oh, wait. If we want oil prices to recover, we don't need to pump so much oil, right? Darn! What are we supposed to do - cut production? That sounds un-American. That's what the Saudis and those other OPEC guys should be doing. Asking a Texan to curb his oil production is like asking him to curtail his consumption of barbecued brisket and bourbon. It just ain't right.
Despite low prices, Texas has continued pumping crude at a record rate - 3.6 million barrels a day in March when the state's crude production peaked. Even though hundreds of drilling rigs have been mothballed, production remains remarkably high, in part because a large number of wells had already been drilled and completed.
Ingham thinks that production is finally starting to decline in Texas, but the drop won't happen overnight. He adds, "If prices were to not recover quickly and not rise much higher than they are now for some period of time, then the outlook in terms of overall activity levels and employment, in particular, is fairly dire."
Well, that's not very positive. I must have been thinking of another item.
Okay, here's one: "M&A expected to surge in 2016." That's great news for a lot of folks, especially for the financial advisors (banks), legal advisors (law firms), and all the people who perform the due diligence work on these transactions. The acquiring company usually comes out with a good deal, especially during a downturn. Asset sales are a win-win because the seller is usually divesting non-core assets for badly needed capital, and the acquirer is buying what he wants at a fair price. Corporate mergers usually benefit the buyer mainly because, well, jobs are lost through redundancy. However, these deals do provide a level of job security for employees at the Justice Department as they take their time deciding whether the mergers break any federal laws.
Final thought is about Saudi Arabia. You can decide for yourself if it's good news or bad.
Saudi Arabia has been dipping into its sizeable cash reserves to pay its bills after enduring 15 months of low oil prices that are its principal source of revenue. If you recall, Saudi Arabia started the rapid price slide when it declined to cut production as it traditionally had done to bolster prices. The Saudis feared losing market share to the upstart North American shale producers and thought it was better to sell three barrels of oil at $30 each than one barrel at, say, $90. Now the beleaguered Saudis are facing huge budget deficits, and the kingdom is supposedly "reassessing its options." Although the timing could not be worse, they're considering an IPO for Saudi Aramco. This may be in the category of - desperate times call for desperate measures.