As someone who has worked in the E&P sector for the past 20+ years, I’ve seen my share of ups and downs in the industry. While the causes of past price swings have all been different, the effects have generally been the same. It’s been correctly stated that when E&P companies have a cold, the oil & gas service sector has a heart attack. Precedent has also shown how quick and significant drops in prices have spurred significant A&D activity. Finally, hiring freezes and layoffs will be inevitable.
What happened last time?
For the latest analogous time, we need to go back to 2008-9. The period saw a decline in oil prices from almost $150.00 per barrel of oil all the way down to under $40.00 per barrel. Permits to drill declined by 45% in 2009 vs. 2008. Even more dramatically, in 2009 oil and gas leasing activity declined to 40% of 2008 totals for both acreage and number of leases filed.
From these numbers we can infer that the service sector should see the most rapid declines. While the numbers of Landman probably won’t drop by as much as 40% due to enhanced A&D activity, they still could see a decline of at least 50%. Similarly, other sectors that supply the upstream exploration activity could see a decline in jobs by as much as 30%. While engineering and geology jobs shouldn’t be impacted so severely, hiring freezes will definitely impact new job seekers. An interesting aside to watch with upstream employment this year will be the average age of employees. In the past, “the first hired, first fired rule” seemed to be in effect. As a result, the typical oil & gas employee in 2000 was someone that started out in the early 80’s at the latest. With the dramatic influx of youth over the past 15 years, the workforce has multiple skilled, trained, and relatively young workers. It will be interesting to see if this is the first downturn whereby we see the upstream oil and gas professionals from the 70’s and 80’s displaced by a new generation.Where will we see more action?
A&D activity should increase throughout 2015 as the higher levered companies and individuals try to meet their debt obligations. While asset sales will increase significantly, there are also several companies that could be purchased entirely due to sinking valuations: Oasis Petroleum, Swift Energy, and Magnum Hunter to name a few. There is also a mountain of private equity waiting on the sidelines to help facilitate purchases and aid in starting new entities if the price is right. Similarly, Royalty and Mineral transactions tend to increase dramatically during downturns. People are much more apt to sell their minerals when their royalty checks drop by 50% a month. Most royalty owners had not seen a decline in their checks until this month as there is typically a 2-3 month delay between when oil leaves the wellhead to when royalty checks are processed. Therefore, the buying and selling of royalty and minerals should increase significantly in the coming months.
It’s been said that “a forest fire every couple of years gets rid of all the dead wood.” While this analogy may sound particularly cruel to someone who just lost their job or a company teetering on the edge of bankruptcy, the words are not meant to be taken literally – it’s just an analogy. Companies and individuals will be forced to become more efficient. Drilling times will continue to decrease. Highly levered companies need to unlever. In the end, we are left with a much stronger and efficient upstream oil & gas sector.
Your Turn
What do you think? Leave a comment below.
Len Tesoro
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I think you are spot on. Yes it hurts, but it’s a reality that must happen to shape things up. You make it thru this, you will be better off and stronger than ever!
I think you are spot on. Yes it hurts, but it’s a reality that must happen to shape things up. You make it thru this, you will be better off and stronger than ever!
I am particularly agreeable to the efficiency aspect of the article. Another advantage to this downturn is that larger companies have altogether quit leasing in some of the “hotter” areas and leaves the field wide open for smaller companies to move in and plant their flag. Another bonus that I have seen to this method is that landowners are almost entirely made up of farmers and ranchers. People who make their living from commodities and are more open to take considerably less for lease bonuses for a 3-5 year lease. Our strategy is to gather acreage in KEY areas during this “bust” to be poised for explosive growth in 12-15 months when wells in these shale plays (one major factor we are at this point in the first place) have depleted and the market rids itself of this massive surplus. Both the cost of leases and seismic exploration have a cost reduction of roughly 50% which means a quicker ROI for investors, as long as they can stomach the wait. A wild card to watch for, in my humble opinion, will be the strength of the Dollar and what effect it has on crude prices over the next 12 months.
I am particularly agreeable to the efficiency aspect of the article. Another advantage to this downturn is that larger companies have altogether quit leasing in some of the “hotter” areas and leaves the field wide open for smaller companies to move in and plant their flag. Another bonus that I have seen to this method is that landowners are almost entirely made up of farmers and ranchers. People who make their living from commodities and are more open to take considerably less for lease bonuses for a 3-5 year lease. Our strategy is to gather acreage in KEY areas during this “bust” to be poised for explosive growth in 12-15 months when wells in these shale plays (one major factor we are at this point in the first place) have depleted and the market rids itself of this massive surplus. Both the cost of leases and seismic exploration have a cost reduction of roughly 50% which means a quicker ROI for investors, as long as they can stomach the wait. A wild card to watch for, in my humble opinion, will be the strength of the Dollar and what effect it has on crude prices over the next 12 months.
Totally agree, Matt. I’ve been thinking for a couple of months now that the time is right for smaller companies to move in. In my area, older rigs are being sent home and newer, faster rigs are replacing them. More one hole pads are being completed, so rigs can move on to the next, quickly, and secure leases. That makes me think that rig washing companies, rig moving companies and other rig up/rig down related companies may become busier.
Totally agree, Matt. I’ve been thinking for a couple of months now that the time is right for smaller companies to move in. In my area, older rigs are being sent home and newer, faster rigs are replacing them. More one hole pads are being completed, so rigs can move on to the next, quickly, and secure leases. That makes me think that rig washing companies, rig moving companies and other rig up/rig down related companies may become busier.