Sunday, March 22, 2020

Attitude Is Everything

To those who have recently lost their job and to those who could in the future, hang in there.  If you love what you do, get creative on how you can stay in the industry.  I’ve been in the business for 34 years and continue to believe that it’s the best industry in America.  We know tenacity, resilience, persistence, and survival better than any other industry.  Think of ways to build on your great technical degrees and experience.  Now might be a great time to expand your knowledge into some emerging technology like analytics, robotics, virtual reality, or artificial intelligence.  Become the next guru in an emerging field or niche.  Now that you’re home-bound, find some online classes to take.  Dream big.

The petroleum industry has some fierce cycles.  My dad was a geologist and I recall the great boom in the 70’s and 80’s.  I graduated from LSU with my B.S. in Geology in December, 1985 right when oil crashed from $33 to $10.  Our senior geology class was the largest ever with 79 students.  Only 3 of us are in the industry today.  I chose to continue the geological path to graduate school.  It was a great time to advance my studies.  I was fortunate to hire on at Amoco on 8/8/88 right after a layoff.  When I asked the senior geologist what the letters “OLDS” meant that were written on the paperweight on my drafting table, he said “that’s the name of the geologist you replaced!”.  I guess I was a bargain at $35,000 per year in 1988.

This current correction/downturn/cleansing/collapse could be a record-setter on many levels.  We have the “triple whammy” of massive debt, rapid collapse in commodity prices (oil & natgas), and an unprecedented, overnight, worldwide shutdown of transportation.  I recently called it a “perfect storm”, but a “thousand-year flood” might eventually be more appropriate.  This is going to take a while to sort out.  I believed that our debt was a major hurdle for many companies at $50/barrel.  I don’t see a way-forward for high-debt companies at $20 per barrel.  

We’ve also learned that we aren’t the “new” Saudi Arabia.  Conventional oil flows much easier and at a much lower cost.

As always, at the end of all manias, the yahoos appear stating their “new found” expertise.  It’s the “bottom of the 9th inning” and the “armchair quarterbacks” arrive just in time!  I would argue that manias usually draw in close to 90% of the participants.  Greed can be a strong magnet.  We all owned a DotCom stock.  Herding mammals love a good stampede.  Toilet paper anyone??? 

If you didn’t participate in the last 10-13 years of unconventional reservoirs’ emergence, then you missed out on one of the most exciting times in the history of the industry.  New technology and new plays all over the country.  I had to advance my geochemical and petrophysical skill sets.  It was a wild ride.

Some continue to rant about “stopping the drilling”.  Yes, if you’re bankrupt, stop drilling.  If your well is uneconomic, don’t drill it. But, stopping the drilling does not make debt disappear.  In fact, when drilling stops, unconventional reservoir income declines rapidly and there goes the cashflow.  With a large debt load, it really doesn’t matter.  The math doesn’t add up.  If we stopped drilling for a year and prices rose, it’s way too late for many companies to service their massive debt load.  Game over.  The larger issue could be oil company defaults that impact the financial system.  Keep an eye on JPMorgan Chase, Bank of America, Citibank and Wells Fargo.

We might see the most dramatic M&A era of our careers in the coming 6-24 months.  Current market caps are amazingly low. Exxon is at it’s 2004 price.  Fifteen years wiped out.  As always in the late stage of a debt cycle, “cash will be king”. 

On that note, the Occidental acquisition of Anadarko will go down as one of the worst acquisitions in the history of the industry.…..before the latest price collapse.  It was a horrible deal structure and over-valuation.  As I’ve said before, it will be the TimeWarner-AOL deal for our industry.  If you’ve been bragging about your crush on the Occidental CEO, you might switch your crush to The Oracle of Omaha, Carl, or the Chevron management team that negotiated a $1 billion breakup fee.  Yes, one babababillion!  I got a $10,000 breakup fee once, but $1 billion!!  Extraordinary.  The unfortunate aspect of the failed Occidental deal is that future female candidates might not get consideration for the CEO role. Hopefully not.  Maybe the return of Mr. Chazen will save the day.

In summary, I believe that we learn the most about ourselves in the “valleys”.  Associate with positive people face-to-face and online.  Don’t let all of the negativity and “armchair quarterbacks” get you down.  Set some new goals and take advantage of this “recess”.
Good luck!!