Strong Demand, Excess Capacity Fuels Uncertainty in Oil and Gas Industry Cites Expert Panel at BoyarMiller Energy Forum
HOUSTON (Apr. 4, 2016) – Heightened uncertainty, increased efficiencies and concerns about China were the key topics of discussion at the annual BoyarMiller Energy Breakfast Forum. More than 250 attendees heard three experts review the impact of the oil and gas industry downturn and share their outlooks for the future.
“Our presenters provided concise overviews of a number of important topics concerning the economy, the geopolitical environment and their viewpoints about how the downturn has changed the oil and gas industry,” said Chris Hanslik, chairman of BoyarMiller. “It was an information-packed discussion that achieved the goal of providing our clients with thoughtful insights and interesting perceptions that may impact their businesses—and provide very interesting topics of conversation.”
Presentations were delivered by Matthew Pilon, managing director of Simmons & Company International, Energy Specialists of Piper Jaffray, David Pursell, managing director of Tudor, Pickering, Holt & Co. and Robert Dye, Ph.D., senior vice president and chief economist of Comerica Bank. Their presentations are available on the BoyarMiller website at www.boyarmiller.com.
“This is the most uncertain time we’ve ever seen in the industry,” said Matthew Pilon of Simmons & Company. “In the 1980s, we knew it was going to be terrible for years. Whereas today, there are a lot of conflicting data that create an uncertain environment and make it difficult for decisions about issuing equity or restructuring debt.”
Fueling the uncertainty is the massive excess capacity across oilfield service sectors, said Pilon. Current onshore U.S. drilling rig utilization is less than 50 percent and more than 80 percent of the total newbuild offshore rigs scheduled for delivery through 2020 are currently uncontracted.
“Pressure pumping is probably the poster child for excess capacity,” said Pilon. That segment of the industry witnessed a huge ramp up in activity, as well as in the amount of horsepower being used per well. The supply chain took a while to slow down and now it is in the range of 20 to 30 percent utilization, according to Pilon. “Companies have been forced to drop their prices and margins, sometimes to the break-even point. It’s a real fight out there in pressure pumping.”
The impact is evident in declining merger and acquisition activity in the oil and gas industry. Pilon said the strong environment from 2009-2013 has dropped significantly.
“Of the U.S. M&A deals occurring last year through March 2016, 32 percent of them are in the consulting, engineering and data/software category,” said Pilon. “This points to more technology and and the need for creating greater efficiencies coming into play.”
Pilon said there have been some positive developments in the oil and gas industry during the downturn as service companies have cut costs dramatically, in more ways than just personnel layoffs. “They have become much more efficient by using technology, examining their cost structures and realizing that the changes taking place today will position them more strongly when oil prices rise.”
Supply vs demand
David Purcell of Tudor, Pickering, Holt & Co. boldly predicted that oil prices will rise this year – perhaps to $80 – because the world is not as oversupplied as some of the data suggests. “We believe the market is much closer to being balanced,” he said. “There is no chance that U.S. oil inventory storage will fill and we are doubtful there is excess storage in developing third-world countries.”
Purcell also stated that global oil demand continues to be strong and only dropped two years since 1987. “We saw a drop in demand in 2008-2009, and then compensated in 2010 with growth at 3.5 percent. In 2015, demand grew almost two percent and that is outstanding. The point is that demand almost always grows and that’s all we need for the industry to get better.”
China and Asia are the largest drivers of global demand growth. “Currently we are seeing really good gasoline growth and almost no distillate growth, which is consistent with a slowing GDP. China is hard to figure out, but important to us overall,” said Purcell.
So while demand continues to grow, U.S. production does not. Purcell said production fueled by shale was phenomenal and has now been falling since its peak in March 2015. He added that China’s production will be also be down for the first time since 1998.
“Demand is strong, U.S. and China production are falling, so why is oil still around $30?” asked Purcell. He believes the reason is OPEC, which he called a “wildcard” with its volatility and geopolitical unrest. “Iran scares the market because of its threat to add production. But we think Iran will be much less than expected.”
Global economic issues
Robert Dye of Comerica Bank called the market asymmetrical with many converging factors impacting decisions. “There is a lot of risk out there and it will take a long time to work its way through the system because the local economy doesn’t turn on a dime and takes a while to come back. I think it will reinforce some conservative behavior going forward.”
Dye said while many global issues are impacting the consumer right now, low energy prices are providing more spending dollars and household net worth is above the pre-recession peak.
“Wages are increasing and house prices in the U.S. are up five percent,” said Dye. “U.S. homeowners are gaining equity in their homes again and that is good news; the house is the piggy bank. Now we are seeing an appropriate amount of credit coming back into the market.”
Dye’s main concern about the global economy is with China, which accounts for half the economic growth in the world. “They are a highly leveraged economy that will crack at some point like all economies do,” said Dye. “But unlike the U.S., China’s market has never gone through real-world stress testing. It is also right next door to Japan, the world’s third largest economy and the world leader in debt. But right now, the global situation is okay and that helps the U.S. economy and energy demand.”
One of the chief economic engines is job growth, said Dye. “Month-to-month job growth is increasing bringing the unemployment rate down. It means the job markets are tightening and we will see some broad wage gains going forward.”
Dye predicted that there will be another increase in interest rates and said the “era of cheap money is over. It doesn’t mean it gets expensive, it means we are going to see it tighten up.”
To view the presentations from the BoyarMiller Real Estate Forum visit www.boyarmiller.com.
BoyarMiller, a Houston-based law firm, is comprised of two practice groups: business and litigation. The business group serves multinational companies, middle-market businesses and entrepreneurs in need of collaborative and strategic representation. The litigation group represents organizations of all sizes, from entrepreneurs to Fortune 500 companies, seeking to resolve complex business issues and employment disputes. See www.boyarmiller.com for more information.