2016: Fear And Hoping in the Oil Patch

by Deon Daugherty, Senior Editor

It was the worst of times. And then it really kinda got worse.

Deloitte LLP’s John England, vice chairman and U.S. Oil and Gas Leader, offered his reflections on the year and outlook for 2016 in a brief white paper released Dec. 10. What it all comes down to is this: Within the space of a year, revenue at exploration and production (E&P) companies plunged 50 percent.

The industry, a pursuit long valued by the wildcatters, the mavericks and certainly not for the faint of heart, has managed the troublesome reality that not only confronts it in the year ahead, but continues to envelope it. As oil prices have dipped in December below $40 per barrel, denial, anger, bargaining, depression and finally, acceptance have crept in, he said.

Upstream companies have pulled out their dog-eared playbook from previous earlier severe declines:

  • Chop capital expenditures (CAPEX) and defer high dollar projects
  • Cut operating costs and headcounts
  • Press supplies for discounts

The first items have been predictably effective. But England has a new idea, though it’s still in progress: hope.

And although his idealism is often enough answered, “Hope is not a strategy,” it sure beats, “No hope,” when it comes to morale, he said.

Without spending too much time spinning his wheels on what’s already gone down in 2015 – prices, headcount, production – England laid out what had been expected as 2015 spiraled downward, but didn’t actually occur. Specifically, a tidal wave of M&A (mergers and acquisitions) and bankruptcies, deteriorating U.S. oil production and a spike in interest rates.

Consequently, 2015 is ending pretty much the way it started.

“What’s different? No one believes prices are going up much any time soon, so people are battening down the hatches like a hurricane is coming,” he wrote, adding as an aside that he’s well-stocked on batteries and bottled water.

Still, England noted the relative resilience of the natural gas side of the business.

The natural gas “value chain from wellhead to burner tip seems to be thriving in an extended moderate price environment,” he said. “This begs the question – are there lessons learned to draw from oil?”

And, harkening back to hope, England noted there are some positives. However slight and not from China, there is Asian demand; production decline simply from natural reservoir behavior, and the potential for ultimately, a more competitive industry.

“More than anything else in business, I believe in the power of free markets,” England said. “The endgame is an oil and gas industry that will stronger, leaner and built to last.

Or, in the words of a phrase repeated so often during times of trouble that we can’t quite pin it down to the original source, the industry can always, “Hope for the best and prepare for the worst.”

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