Developing An OFS Business Model For Today’s World #oilservicesequipment

By 16th December 2015 Industry News No Comments

Sipping his morning coffee, the oilfield service company CEO contemplated the dire business headlines that reflected the current environment his business was confronting. More important than thinking about next week’s jobs and payroll, he was trying to assess what he could, should or would have to do for his business to compete in 2016 and the years afterwards. The big news that morning was Kinder Morgan Inc.’s (KMI-NYSE) announcement it was slashing its dividend by 75%. The move reflected the challenging business environment the 84,000-mile pipeline operator was facing after financing significant new pipeline and energy infrastructure investments with debt that had now become an albatross on the balance sheet. The prospect of the cut was signaled by investors dumping the company’s shares and driving its price down by a third in the prior week.

No sooner had KMI disclosed its distribution cut, when another troubled energy/natural resource company, Freeport McMoRan, suspended its annual dividend and slashed its capital spending plans for 2016 by 20% and by 40% for 2017. As the CEO read his paper, he reflected on the fact that this move wasn’t totally unanticipated given the capital saving actions of other large natural resource firms such as Anglo American, Glencore and BHP Billiton More troubling, however, were the headlines announcing the 18th exploration and production company filing for bankruptcy, investment broker ISI’s E&P spending survey for 2016 signaling another 11% cut on top of the 20% reduction this year, investment broker TPH pointing to their proprietary survey of major oil industry capital projects showing 150, or nearly a quarter of those they track, have been postponed or delayed due to weak oil and gas prices. That was not surprising given that oil prices had just fallen to a 7-year low after OPEC couldn’t get its act together in Vienna the prior week.

Add to all this bad news, there was the ongoing show in Paris where tens of thousands of climate change fanatics were huddling trying to forge a legally-binding agreement on the nations of the world to cut their use of fossil fuels dramatically. If that wasn’t enough, the attorney general of New York was investigating ExxonMobil (XOM-NYSE) for supposedly misleading investors about its knowledge of the climate harm from using the company’s oil and gas products.

Lastly, there was a small article buried inside The Wall Street Journal reporting on the latest projections from the U.S. Department of Labor showing that America will generate 9.8 million new jobs, a 6.5% increase, from 2014 to 2024. That’s good news – but wait, the article said that rate is historically low. During 2001-2007, new job creation grew by 14% and it grew by 17% during the 1990s. According to the Labor Department, this slower job growth means the labor force participation rate will fall by two percentage points to 60.9%, the lowest it has been since the days of President Richard Nixon. What this means is that the U.S. is condemned to economic growth of 2.2% per year, on average, well below the long-term growth rate of 3%. Even though we are selling 18 million new cars and trucks this year and Americans appear to be driving them more, their better fuel-economy has limited the growth in gasoline use, and that’s in a period of very low gasoline pump prices. What happens when prices rise? We know they always do. So will that kill demand growth? And don’t forget what the Obama administration wants to do to our use of energy – kill it with taxes, regulations and shame!

“Let’s see where I stand,” thought the CEO. “I have a good product that the E&P companies need to drill and complete their wells. My customers have always been supportive and loyal – often giving me a push to expand to meet their needs, but lately they’ve become somewhat cranky about our prices. I guess I better go talk to them and explain why I need to charge so much. Oh wait, I did hear from our salesman that our competitor in West Texas was cutting his price to try to lure my customers away. I guess I better go talk to those customers. You know – that up close and personal thing. But if those guys were part of the capital spending survey, I better find out quick how much money they do expect to spend next year and what that means for my business. I may have to make some really tough decisions about staffing next year – especially if I want to be ready for the next upturn, which we know is just around the corner.

“I better make a point of dropping by my banker, too, to make sure he’s ok with our finances. I’ve heard rumors around town that old Joe has become somewhat of a hard-ass, but I’ve dealt with him for twenty years. Even went through that Asian currency crisis period in the late 1990s together when oil prices crashed and drilling activity seemed to drop off the table. Heck, we even weathered the 2008 financial crisis with his help. But I did notice that Joe looked more stressed the last time I saw him, and he muttered something about the bank regulators pressuring him to reduce his energy loans.

“Maybe it’s time for some bold steps. I wonder what I could sell that would let me pay off the bank? Yes, my business would be smaller, but it sure would feel good not having to write that check to the bank every month. After I visit with all my clients, I need to try to figure out who was sincere about his plans and who was just trying to make me feel good until they could get me out of their office. What does it take for me to run this business at breakeven? That’s a scary number. I didn’t realize it was that high. I wonder how it got there, but more importantly, what I can do about it.

“You know, if those Wall Street guys are anywhere close to being right, it’s going to be pretty slow next year. It will be pretty quiet around here, too, as I will have to let a number of people go. Those are the toughest calls. Do I let that promising, young new engineer go, or am I better off letting my older, knowledgeable, but more expensive guys go? Hey, wait a minute. I bet they could all be trained to do some other tasks in those business lines we always thought about expanding into, but dismissed because our existing business was so good. Maybe I should go across town and visit with old Fred. He and I often joked about how it might make some sense for us to get together so we could offer to do more for each of our customers than we can do alone. Yes, an expansion strategy would certainly be bold.

“Before I call Fred, I think I’ll dig out the business cards from those business development guys with Big Red and Big Blue. I wonder if they would be interested in my business. They sure threw around some big numbers when we talked in early 2014, of course that was when oil was $100 a barrel. I remember my Daddy telling me that he never believed that oil would sell for a three-digit price, but then he grew up when oil sold for a low single-digit price. What the heck, if they’ll pay me the value of my company based on my latest earnings, I think I might just take it and head to the house. I would sure enjoy spending more time hunting and fishing and playing with the grandkids. I just need to make sure I don’t get in Momma’s hair too much.

“So let’s see, what’s my plan? Pay off my banker. Stay close to my customers – know what they are planning, but definitely make sure I know as soon as possible if they aren’t going to do what they said they were. I’ve got to be prepared for a lot less business next year, so I better figure out how skinny I can make this organization. Unfortunately, there’s no room for luxuries or deadwood any more. In fact, being understaffed and overworked probably isn’t the worst plan given today’s environment. It might also help my waist line. What I need to make sure is that no matter what next year brings, I want to able to keep my doors open.

“Surviving, while critical, isn’t necessarily a game plan for the long term. I know the world, and certainly America, will need more oil and gas for decades, unless those climate change people convince governments to outlaw the stuff. I’m not sure you can live depending on the wind blowing all night and the sun shining all day. More importantly, if I still want to leave something for my children and grandchildren to prosper from then I better figure out a business plan for the next few years, at least, and quick. I really do need to see whether Fred is available and what his pulse is about maybe teaming up. The one thing I’ve learned after all these years is that depending on just one business line – no matter how good it gets in the good times – means I will struggle when the oil business turns down as it seems to do on a regular basis. I ought to get out the Petroleum Club roster and see who else I might want to visit with. Maybe I should ask some of my key field people to tell me who they see out there that provides a good service, has good equipment, a solid safety program and who commands the respect of our good customers. There’s no better way to survive than to be able to provide more products and services to your good customers.

“However, I also can’t forget to make those phone calls to Bid Red’s and Big Blue’s business development guys. Gee, I wonder if maybe there isn’t someone else who might be interested in my company. I wonder how I go about figuring that out. Maybe old Joe at the bank has some contacts, or at least ideas about where to start looking for that help. Yes, 2016 is going to be an interesting year. But if I have my debt paid down, some cash in the bank, plan to operate in a barebones manner, even though it is going to be painful getting there, and stay close to my customers to see what they are going to do, I should be able to survive. Making sure that happens is the hard part, but I know I can do it. What excites me, though, is that I’ve now begun to develop a plan to grow when activity turns up, as I’m sure it will, even if we don’t go back to the high oil prices of the last few years. What I don’t know yet is whether I’ll be growing by combining with some of my friends and possibly competitors, or if it means I sell out to a bigger company. Even if I have to become an employee with a number other than one, at least I will have put some money in the bank for my old age, my kids’ education and maybe even a little left over for the grandkids. What’s that old expression – it’s darkest before the dawn? I think I do see the light to a better future.”