Is This Upturn Real?

We are all excited about the apparent turn around in the oil and gas industry. Oil and natural gas prices are higher now than in the past ten years. Just this morning (October 19) West Texas Intermediate is trading at $83.32 and Natural gas is selling for $5.06. Article after article are coming out with predictions of over $100/bbl by year end and even higher next year. Yea, well, let's not get too excited.

Halliburton came out with their earnings call recapping Q3 of 2021 (https://seekingalpha.com/article/4460619-halliburton-company-hal-ceo-jeff-miller-on-q3-2021-results-earnings-call-transcript) and the questions asked by the investment community were interesting. Of course, the usual questions about earnings, what sectors and what geographies were doing well, where growth was expected...all that typical stuff. However, more telling are the repeated questions on growth numbers being reported vs inflation influences. The smart money is not biting on all the hype of great growth and zooming upturn in the industry. They are realizing the price increases are directly tied to the inflation numbers and the real growth is probably less than 5%. The rest of the increases are attributable to inflation...somewhere in the 'real' 15% range.

I have also seen an upswing in hiring of the OFS companies these last few month, that is encouraging. But let's dig a bit deeper. Who is being hired? From what I can tell, the vast majority of hiring is attempting build the various companies sales forces. They see the uptick in activity and want to do what they can to take advantage of this. Smart move. However, this cycle is very different than those of the past. We were smacked with the most unusual event in modern times, the Covid Pandemic and the resulting shutting down of all business processes. No face to face meetings, massive lay-offs of personnel, complete collapse of technology development (which I wrote about here: https://jpt.spe.org/oilfield-life-after-covid-19-crash).

The sudden increase of sales staff is the industry flailing about in trying to do business as it was done prior to the catastrophic changes brought on by the Pandemic. Because of the very unsettled political climate in the US and globally, along with nearly a complete turnover in personnel, operating budgets and the new interest on ESG investment, the 'business as usual' just won't cut it. What is different and what needs to change?

Let's look at the government uncertainty I mentioned. In several projects our group is working on currently, we are experiencing much confusion and opposing ideas within the government agencies that influence oil and gas drilling. One example is one agency concerned with forcing operators to remove idle offshore platforms while another agency is working very hard to encourage re-use of those same platforms with other activities non-oil related to keep the platform in place. Programs such as electricity generation from wind sources, bio-farming, hydrogen production...a whole myriad of ideas. The owners of the platforms are struggling as to what will be approved and accepted that they don't know where to turn. Then, the immediate actions taken on by the current President's Administration in reversing nearly every executive order put in place by the last Administration regarding oil and gas production did not help. We have seen how that has backfired with the desperate attempts of the new Administration first going to OPEC+ begging for increased output (and rejected) to him meeting last week with the presidents of most of the major energy companies trying to work out how production can be increased. All of this while pipeline approvals still being rejected, Federal land and offshore leases suspended and permit processing being slow walked. Not exactly the stable environment for long term planning by the oil and gas industry.

Another interesting comment hidden in the Halliburton call this morning was the admission that new technology programs will not be increased. Those exact words were not spoken, but the admission that no change of the approximately 6% spend on innovation seen in the last several years will not change. This tells me that the technology groups will not grow significantly and most of that money goes to sustaining existing products rather than new innovations. Again. be happy with the technology you see because the changes will just be lipstick on the existing pig.

Why these current exciting prices are not sustainable. The economies of the global community are at a dangerous tipping point right now in my opinion. There is much panic with the premature move away from hydrocarbons to 'renewables' and the drawdown of traditional hydrocarbon reserves to meet overexaggerated promises of silly politicians to keep the looney Left quiet are suddenly biting them in the rear end. A very cold winter is projected this year and suddenly (gasp) the realization that the alternative energy sources will not be able to keep up with the demand. I know this sounds doom and gloom, but I am sadly predicting that there will be many deaths in Europe this year because of lack of sufficient energy. With all of that said, we see the prices of oil and gas still continuing to rise. We will have one of two (if not both) scenarios play out very soon. Either the producers will start over producing, driving the price down, or the world's economies will start collapsing, forcing a lower demand for energy. The overproduction scenario is not good for the oil industry long term but it is better than the other!

Is there a solution for long term stability? Well, we don't have much control of the global economy so I can't address that. However, if the US is smart (and I question that more and more) we will finally come up with a true national energy policy that carefully balances the need for complete energy independence with a flattening out of the peaks and troughs of the nature of the industry. Sadly, this current administration has destroyed the short term chance of energy independence we saw at the end of the last administration. They also seem to be hell bent on doing what they can to keep the prices up. That may sound strange, but their pet project of 100% alternate energy can only work if hydrocarbons are so expensive that the alternate looks good.

Now a commercial message from us. My teaser on my profile says we are 'Offering a unique finance program for drilling/completion/production'. I did mention that the industry has been turned on it's ear from this pandemic event...and I don't see anything that would get us back to the 'old normal'. The media focuses on the major operators...all of which are typically self funded for their programs. However, I truly believe the real savior for energy independence in the US will be the smaller operators...those that live and die from external funding. The combination of the 'sucking black hole' of the economic fiasco of the unconventional drilling programs of the last 5-10 years plus the new emphasis on ESG investment has dried up the external money.

Our group has studied this for several years and realize things needed to change. We have built a consortium of OFS companies willing to take a limited risk in working with the smaller operator, plus the way we structure our program to actually utilize the concept of a 'consortium' of smaller companies, each working independently but with volumes combined to obtain economies of volume to offer up to nearly 1/3 the cost of drilling and completion costs, and giving institution investors a safer and less cumbersome avenue for their dollars. Our team can bring a group of highly experienced and seasoned specialists that can take the projects from cradle to grave, offering an opportunity for increased drilling for the operators and an new customer base for the OFS companies. If interested, drop me a line.