Survival Strategies in Tough Times

The Small Business oil and gas producer in America has always faced the challenge of falling product prices from time to time.

This particular time is doubly challenging. Last week Russia refused to go along with cuts in production necessary to balance the market. This resulted in Saudi Arabia’s countering with pricing discounts that have collapsed world oil prices. At the same time, the world is facing a rapidly decreasing demand forecast due to the Coronavirus.

There are many strategies, depending on the company and several other factors, for coping with these tough times. But here are a few basic principles that most likely apply to us all.

  • Denial or holding onto unrealistic expectations is not a good strategy. This particular challenge is for real. While no one knows how long this will last, we are much better off to embrace a realistic viewpoint and take calm, not reactionary, but immediate actions. Depending on a quick solution by Governments or geopolitical events to bail us out is a siren song destined to wreck us on the rocks.
  • All expenses matter. No expense is too small to be considered. Little things do add up to big things. And mindfulness about expenses becomes a healthy ongoing practice. Like Peter Drucker said in Managing for Results, “There are no profit centers, there are merely cost centers.”
  • Communication is especially important in tough times. We should communicate with our vendors. If we are going to be late with payments, we should tell them and even work out longer terms. I remember watching my Dad exercise this principle 50 years ago. He called Schlumberger and Halliburton, who he owed more than he could afford to pay. He told them he couldn’t pay them at the moment. He asked them to allow him to take a longer time to pay the invoices. As I recall they gave him six months to pay. He was able to make it on that basis and remained loyal to them for decades for their understanding. The same principle applies to all vendors. This is also a good time to negotiate for services. The service sector is in this with us. In fact, they are even more vulnerable. My experience is that they will work with us in good faith. They will not do it if we don’t ask.
  • We should communicate with our bankers. If we have debt, and most of us have at least some, we should have an open and transparent conversation with our bankers. We should let them know where we stand financially and what steps we are taking to “weather this storm”. If we need to, we shouldn’t hesitate to ask for interest only payments. Depending on the bank, they will almost always work with us. But just like any of us in business they don’t like surprises or being caught off guard. I have yet to meet a banker that wants to be in our business. So, it is in their best interest to help us stay in ours.
  • We should communicate honestly and openly with our employees. In my company, in tough times we have always had a “team meeting” where we discussed our various options. Without exception, we agreed to take cuts across the board. Yes, I let them decide along with me. We never laid anyone off because of a downturn. Letting your employees participate in your decision-making process gives them ownership in the ongoing vitality of the company and simply empowers them to care. But, at the same time if you have employees who are not carrying their load it’s a good time to move on from them.
  • Maybe most importantly of all, while making tough decisions try to maintain a positive, but realistic attitude. This too shall pass.

~Mike Cantrell

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The Many Lives of the American Shale Drilling Industry

The challenges facing the American horizontal drilling and fracking industry, also known as the shale drilling industry, have been documented extensively over the past several years. The article linked below calls them “casualties.” Are they?

The Organization of Petroleum Exporting Countries (OPEC) lowered oil prices by increasing production to regain the market share that the U.S. Shale drilling industry was taking from them- six years ago. The shale drillers kept drilling.

OPEC thought these drillers could not be profitable with oil under $80 per barrel. They reacted by lowering cost and improving technology. Prices continued to fall and have yet to recover above $70 West Texas Intermediate(WTI); the benchmark price of U.S. oil. In fact, as of today, OPEC is attempting to drill another nail in the coffin of the U.S. Shale industry by increasing production and crashing the price to $31 per barrel (WTI).

Average decline rates of 70% of recoverable oil, in the first three years, require that these companies continue aggressively drilling in order to just keep up  with current production levels. They have done that.

These horizontal drilling companies have encountered numerous other problems, not the least of which is fracking interference from their own subsequent wells thereby diminishing the reserves that they had previously counted on their financials. They’ve acknowledged this – and kept on drilling and fracking.

Investors have all but abandoned them for lack of returns on investment. They are taking hits that few industries have survived.

When the horizontal drilling and fracking industry began in earnest the U.S was producing around 9 million barrels of oil per day. For the past two years U.S. production has hovered stubbornly, above 13 million barrels per day. The horizontal drilling and fracking industry is the sole reason for this resurgence of American oil and gas production.

The destruction of hundreds of existing vertical wells by their horizontal frack jobs resulted in the formation of the Oklahoma Energy Producers Alliance (OEPA). The OEPAs sole mission is the protection of the small business oil and gas producers in Oklahoma.  Since its inception three years ago this organization has been vigorous in opposing the destruction of vertical wells from horizontal fracking and the policy issues allowing and incentivizing it.

The horizontal drilling and fracking companies are tenacious and “bare knuckle“ opponents. But, I do not consider them as permanent adversaries. This article calls them casualties. I call them survivors in the ongoing tradition of the US oil and gas industry. They will look different than they do now. There will be more bankruptcies and consolidations. But the industry and the technology that has spawned it will continue to improve and survive.

It is no secret that I have been active in the battle between the large horizontal frackers and the small business oil and gas producers. But I have never underestimated them. Neither should OPEC or the American public.

https://www.wsj.com/articles/u-s-shale-drillers-could-be-casualties-of-oil-price-war-11583769768?mod=djem10point

~Mike Cantrell

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