They say hindsight is 20/20: It’s easy to know the right thing to do after something has happened, but it’s hard to predict the future. But we know a bit about the future as 2017 begins. Oil is higher, the rig count is rising, budgets are up, and most agree this year will be better than the last two.
Without quoting the old bumper sticker for the 10-millionth time, has anyone learned anything? If oil prices surge and business takes off again, will oilfield service (OFS) executives run their businesses differently? Or, given the opportunity, will we make the same mistakes again?
If you happen to make a few bucks again in 2017 and beyond, write these points down and pin them to the wall somewhere visible.
- Commodity prices are cyclical Oh yeah, that one. What goes up must come down. At $100/bbl, there’s oil everywhere, not just Canada. And Canada has high costs that are rising more thanks to our governments. While nobody in their right mind would go into any business and stress test the income statement and balance sheet for a possible 75 per cent revenue decline (WTI plunged from US$105 to US$27), the one thing the oil industry has proven repeatedly is it never stays the same.
- Debt must be paid backVirtually everybody borrowed too much. That’s what governments wanted following the 2009 recession when central banks cut their lending rates to one per cent or less to inject money into the economy. A few countries have examined negative interest rates to encourage borrowing and punish cash. OFS was no exception. Credit was easy. But when customers get a cold, OFS gets pneumonia as cash flow goes to zero or less. When that happens, that’s how much debt you can carry: zero. But what a party from 2007 to 2014 as OFS borrowed billions to add capacity and retool for the shift from vertical to horizontal wellbores. Three pressure pumpers—Trican, Sanjel and Calfrac—entered 2015 with a combined $2.5 billion in debt. One sold everything outside of Canada, one didn’t make it, and the third recently raised equity again to meet debt covenants. As everyone who forgot has learned (if they ever actually understood), when you sign over the senior secured collateral position to a lender, you’ve effectively sold the company. Several outfits run by owners who should have been around long enough to know better went broke.
- Your clients are not your friendsAfter years of experimentation, horizontal well/multistage fracturing really got started about 2005 in the Barnett Shale when the methodology was refined to the point where results became commercial and repeatable. Across North America, operators determined many other reservoirs could be exploited. What followed was a paradigm shift in required equipment and services.Bigger rigs, walking rigs, huge coiled tubing units, massive fracs, various derivatives of multistage packers, directional tools, new bits, fancier mud, high volume cuttings handling and so on. OFS outfits invested billions primarily financed from their own balance sheets.As techniques were refined, the pace of change was staggering. A solution in 2010 could be obsolete two years later. A few smart guys only built under long-term contracts with credit-worthy customers. Everybody else just added capacity.When oil collapsed, everyone learned the clients from whom they bought and relationships they built on a handshake became utterly mercenary. The lesson learned? In the long run, you might make as much or more money saying no to a customer as saying yes.
- Save a little cash for a rainy dayOr possibly an inland typhoon, which is what hit the Western Canadian Sedimentary Basin. If you’re publicly traded, there is no reward for accumulating cash reserves. You’ll be punished as investors conclude you’re out of ideas. They want the money either invested in additional capacity or returned to shareholders via dividends. Private guys don’t have to tell anybody, and when business is good, they can take cash out of the company in the form of dividends. But as many private operators learned the hard way, when times are tough, the bank wants some cash put back into the company. Many did this because they saved some of the money, but several others unable or unwilling to do so are no longer with us.
Analysts say with great confidence that U.S. light, tight oil is going to make a huge comeback with higher oil prices. But what happened was only possible because OFS invested billions. The future will be different, and this is as it should be.