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Operators missing in action? The financial community remains decidedly cynical when it comes to allocating investment dollars to the oil and gas exploration sector, says rig newsletter From The Land Rig Newsletter April 28, 2000
In many ways it was the generic 3-D geology slide. You saw it everywhere E&P companies made presentations to the financial community back in 1996, ‘97, ‘98. New technology enabled operators to exploit natural resources. It was a reason to invest in the industry. The end game was Production Volume Growth. It was the only way to make money in a commodity industry, operators explained.
Billions of investment dollars poured into the industry based on those geology slides. Then oil and gas commodity prices collapsed in 1998. Production volume went up alright, but operators lost money. All that investment virtually disappeared into the ground. During a boom time economy, the E&P sector was one of the sole arenas in the U.S. where investment dollars essentially disappeared.
Investor community hasn’t forgotten The investor community hasn’t forgotten that. That’s important in trying to determine why the level of field work has not kept pace with commodity prices. This is the time of year when things normally change for the better and it looks like that process is under way. Still, all is not right with the oil and gas operator.
Fewer operators today show geology slides at the energy seminars. The new slide ‘buzzword’ is ROI, or Return on Investment. Even so, the financial community remains decidedly cynical when it comes to allocating investment dollars to the oil and gas exploration sector. That was the other impact of the geology slide. The operator talked about the great potential which the slide represented this year. Next year, the project wasn’t even mentioned in presentations. Those geology slides demonstrated that operators had a tougher time generating oil and gas through the drillbit than their investor relations people like to admit.
The impact has carried over to today. You see it reflected in stock prices for E&P companies.
While oil and gas prices climbed to cyclical highs over the last year, stock prices for E&P companies remained at depressed levels — even as operators began to demonstrate earnings. To the contrary, the oil service side of the industry witnessed values growing to levels last seen at the 1997 industry peak — even though few service companies demonstrated profit.
Avoiding geological risk This market phenomenon indicates the financial folks are betting high commodity prices translate into field work for service firms. Rather than investing in geological risk, investors jockeyed over the last year to position themselves for increased field work.
Over the last 60 days, several investors who got in during the low price period in 1998 began turning their portfolios over.
It’s a mixed consensus out there. There are still those who got in early, but still believe the service industry has a significant run up ahead as operators return to the field.
Lastly, there is a new group of investors coming on board. Staff members achieved earlier success in technology or other sectors. Now they are looking at oil and gas.
Many of these folks are in their late 20s or early 30s, adding a decidedly younger cast to financial energy conferences. This is in steep contrast to oil and gas drilling conferences where it is rare to see anyone without gray hair these days.
At an inflection point? Is the industry at an inflection point as far as field work? The assumption over the last year is that high oil an gas prices should translate quickly into field work.
That did not happen in 1999. The reasons may be fairly obvious in retrospect. Most analysts are overlooking the magnitude of the depression the operating community experienced over the last 18 months. Besides hemorrhaging billions of dollars in money, the operating community eliminated tens of thousands of jobs in a scramble to stay solvent.
While operators are making money now, thanks to high commodity prices and low internal costs, the large sums of money lost during the downturn severely crippled balance sheets, forcing companies to merge, sell properties or direct capital from high oil and gas prices into de-leveraging debt.
If anything happens in the field, and the word is it will, the investment stimulus must come from internally generated funds. The assumption now is that the industry is on the verge of seeing this very thing happen, which makes the second half of 2000 a very attractive prospect.
A return to peak levels? Will things return to peak levels? Harder to say. In the old days of geology slides and production volume growth, operators would have stampeded to the oil patch by now. In the new regime of Return on Investment, operators are a little more cautious about how their capital is directed.
Did anyone mention the gas crisis just around the corner? No, that’s not gasoline, though spot market shortages that could surface later this summer, most likely in West Coast markets.
With all the attention over oil the last couple months, the North American natural gas situation has been largely overlooked. It’s going to get tight on the natural gas side of things later this year. If you follow the truism that gas production and gas drilling correlate, the implications for the land drilling contractor are evidently positive.
The gas industry no longer needs colder-than normal winters — or even normal winters — to tighten things up. The treadmill on which the industry has been running to supply just-in-time natural gas production for growing demand increased its speed a little bit in the last year.
It’s not clear the industry has fully adjusted the pace of field work accordingly. That re-adjustment will come later this year.
The natural gas situation Two anecdotes to illustrate the U.S. natural gas situation.
Canadian exports to the U.S. gas market climbed 10 percent to 3.3 Tcf in 1999. Part of the increase is due to the capacity expansion of the Northern Border pipeline. Despite the increase in exports, the U.S. consumed virtually the entire gas surplus last winter.
The Alliance pipeline will come on stream this November, providing another 1.7 bcf/day capacity. This is about the same amount as new gas-fired turbines will require as they come on the market for power generation over the next couple years.
The scramble is on. The U.S. must generate storage at the rate of 11 bcf/day between now and November 1.
April is typically the swing month when gas withdrawals stop and gas injection into storage increases. This April, the industry experienced several net gas withdrawals. The season is starting one month late. Only a warm 2000-1 winter may avert a tight market.
Editor’s Note: To subscribe to The Land Rig Newsletter, go to www.landrig.com or fax 806-741-1533. A three-month introduction costs $75.
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