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.
What do you think? Leave a comment below.