As crude oil prices stabilized at lower levels and natural gas prices weakened recently, investors quickly pocketed their energy stock gains, sending oil and gas equities into a dive. So much for gaining the confidence of long-term investors with economies of scale (mergers, acquisitions, etc.)!
Some investors are looking for a different style of management than producers and service companies have operated with for decades. They aren't willing to shift from commodity-style buy-and-sell strategies until they see it. However much pressured, producers and service companies seem powerless to make the change, perhaps because the change reaches too deeply into the corporate psyche. For example:
- Are corporate boards hesitant to abandon traditional shareholders, who measure success in terms of discoveries, reserves added, and new contracts, in favor of newer investors who insist on top-line growth?
- Is it because managers tend to focus too closely on risk minimization, constrained by necessarily narrow financial and technical training (vertical commodity business), and driven by the reality that single errors can lead to deadly multi-billion dollar losses?
- Is it because oil and gas management career growth tracks overly penalize failure in new ventures, especially in non-core business areas, and producer budgets aren't designed to accommodate "learning-type" failures?
The number of production and service companies that have successfully spanned the gap into counter-cyclical businesses, while protecting the profitability of traditional core functions, can be counted on one hand.
Because their search is so focused on economies-of-scale, are the most efficient producers and service companies least able to think laterally? No one knows - yet. But it may be time to ask: Should the industry start searching for a new breed of wildcatter?
Day rates vs. development
Oil and gas producers are claiming that higher drilling rig day rates are impacting development decisions. Drilling contractors say there is more upside to go before producers truly alter development decisions.
Drilling expense assumptions are a major determinant of cost recovery and profitability in field development. For this reason, rig contracts often are locked down to a projected day rate before field development gets underway.
On the other side, contractors say producers put lots of pressure to acquire the latest rig "gizmos," expecting the additional costs to be covered by someone else's day rates.
Expect to hear lots of day-rate squabbling and contract performance complaints in the coming months - maybe years, if we're lucky - and less about legal action. These are the sounds of a healthy market.
The warning signs at some distant airports and borders - "Wanted: investors; Not wanted: profiteers" - should be present. But they don't exist. A political split personality afflicts some countries with a history of socialistic economic supports. These countries need outside energy investment, but public officials there have great discomfort accepting the profit margins needed to undertake that risk.
Government officials of all persuasions and origins find the claim that "foreigners" are stealing natural resources plays well with citizens - producers simply don't have an answer to it. Producers also are accused of extracting profits locally and "wasting" them elsewhere - a situation that may be true because recovery and marketing of oil and gas are not uniformly efficient.
Investment risk compensation is difficult to justify to someone who sees a return of principle or loss as the price of business entry. Also difficult to explain is that profit expectations originate with oil and gas shareholders, and corporate leaders are the instruments of that passion, not the creators.
These situations remind us that E&P opportunities await those producers, large and small, who possess social and local involvement skills, as well as risk hedging capabilities.