The oil industry crash that started at the end of 2014…
… Doesn’t seem to have finished yet as the jobs outlook around the world has yet to improve. There are a few exceptions and anomalies such as the difficulties in finding frack crews, or the resilience of some of the Middle Eastern countries, due to production costs at or around $10 Bbl.
What we’re seeing are similar dynamics to past busts, not just in oil and gas, but in many industries.
Here are a few observations:
The largest companies are resilient due to the long term view they take of the market, and almost unlimited access to capital. For them, surviving a downturn involves adjustments such as accounting tweaks, bond sales, project deferments and job cuts.
Medium sized companies are selling off weaker assets, focusing on cash flow and becoming leaner. One example might include negotiating faster settlements for receivables and delaying payments to suppliers. The focus will be to look at under-performing assets that could be sold, rather than getting taken over by those higher up the food chain.
Small companies find out how valuable their business model really is. In good times, budget can be allocated by medium to larger companies with less caution and/or oversight. Of course, all companies do their best to be efficient at all times, but invariably there will be waste and frivolous expenses during booms. Small companies and start-ups that can survive during good times, might find that their goods or service is not needed when belts start to tighten.
We see daily reports of mergers, acquisitions, discoveries and project news for mid to large scale companies. This article will look at how a couple of smaller companies are riding the storm.We got feedback from 2 very different companies…
… Then see how the lessons learned might help others who are also in the same position.
Relentless Pursuit of Perfection Ltd (rp²) are a leading wells consultancy company. They work with majors to facilitate seminars such as DWOPs, CWOPs and other performance/efficiency based workshops.
2015 and 2016 were fairly standard years for their main workshops, although they saw a drop off for interest in drilling coaching and other lower level services. 2017 is looking to be one of the busiest years ever.
We reached out for a quote from Dave Taylor, the Managing Director at rp²:
We’ve seen a complete drop off for coaching services which is to be expected as many people have dropped down to perform roles that would normally be beneath their pay grade.
The first half of 2017 was one of our best 6 months ever for the larger workshops. We’ve been very busy performing DWOP’s for mid to deep water projects. This might seem counter intuitive since deep water has been hit hardest by the crash.
In a $40-$60 price range, efficiency and cost cutting becomes not just a preference, but a necessity in order for a deep water project to be viable. The majors know about the new exploration crash, and the lead times to get a new project online.
They need future production, but it needs to be profitable. This is where rp² come in, we help major oil companies secure future supply, with minimal risk to their balance sheets by keeping efficiency high, and costs down.
So the lesson here, is that companies need products and services that help them survive. If you can help increase efficiency, and/or lower costs, then you’ll be needed as long as the industry itself survives.Quality, health, safety and environment are facets of exactly the same approach to the business. We can add efficiency and cost saving to the list.Location, location location…
Another way that a small company can survive, is to be placed in a location that is not being hit by the bust.
The oil and gas industry has always had a large transient sector. This applies to companies of all sizes, as well as the workforce themselves. In every oil country around the world, you’ll find satellite offices, and an expat workforce.
Why are there expat oil workers all over the world? The reasons are partly personal such as a love of travel or adventure. The main reason is financial, people and companies move to fertile locations based on economic opportunity. Sometimes these opportunities appear on your doorstep!
We spoke to Josh Munro the CEO at FROutlet, an e-commerce company who sells fire resistant clothing and equipment to oil and gas companies and workers.
Based in Texas, they’ve seen a steady increase in business in the past couple of years, although not without challenges.
The boom in the US onshore oil business has definitely helped us increase turnover. Through feedback from our customer support, as well as seeing patterns in customer addresses, we know that increased drilling activity has helped us.
We send a lot of packages to the Permian Basin, and Eagle Ford for example. We still have our own challenges such as competing with some of the huge national and international e-commerce retailers.
Being based in a booming area (Texas) and offering the same high quality brands, free delivery and money back guarantees has allowed us to do well. We realize how the global oil industry is doing, and we’re thankful that we’ve seemed to have stayed in the eye of the storm so far. One thing that is interesting, is that we tend to sell high end products such as those from Ariat, during good times and bad. Safety is something that should never be compromised on.
Whilst these two companies featured provide only anecdotal evidence, and there are no guarantees in the oil business, there are a couple of takeaways:
Whether you’re an individual worker, or part of a company, are there services and products that you can focus on, that are suited to a bad market? There are likely to be some ways that you could pivot, to allow yourself to thrive the way that Dave has done?
Are you based in the best place for the professional product or service that you’re offering? Now might be the time to consider a re-location of you’re an individual, or an expansion or satellite office into a more fertile area?
Something interesting to share?
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Source: U.S. Energy Information Administration, Short-Term Energy Outlook
In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.
Source: U.S. Energy Information Administration, based on Baker Hughes
Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.
EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.
Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.
India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.
A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.
If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.
EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.
Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b
Headlines of the week
Midstream & Downstream
The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.
The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.
Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.
For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.
All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.
Supermajor Financials: Q1 2019