Survive to thrive

Anyone that reads this column every month will know that there have been some common themes to my take on the oil and gas industry this year.

Welsh.

First, is my criticism of the short-term thinking that has permeated the industry to its considerable detriment. Second, is the assertion that better times will come given the certainty that, provided the broader economy is in decent shape, in time, supply and demand will fall into balance. All oilfields deplete and if they are starved of investment – as has been the case for the last seven quarters – production falls significantly faster than normal.

In recent weeks, crude prices have begun to firm, rising from US$28/bbl lows to around $40/bbl, partly because of the “production freeze” rhetoric from Saudi Arabia and Russia, but also because the production declines in North American land have been accelerating.

It has also helped that concerns about the health of the giant US and Chinese economies have abated. This has prompted a much more constructive tone by most industry commentators, many of whom now anticipate significantly higher crude prices by the end of the year.

Unfortunately, stronger crude prices will be of little solace to the 350,000 oil workers globally who have lost their jobs thus far. That number is set to rise significantly through the remainder of 2016 and 1H 2017, because higher prices will not percolate through to oil service spending until well into 2017.

Only the fittest companies with the best management and the strongest balance sheets will survive this industry downturn. However, when the market does bounce back, it will come back strongly because of the huge volume of work that needs to be done to catch up on essential activities that have been deferred or cancelled.

In the interim, at Simmons & Co., we hope to help some companies that are operationally sound but cash flow challenged by allocating a proportion of our private equity funds to support distressed businesses. We are doing this in the belief that when the market turns a significant proportion of oil service capacity will have evaporated and that those companies still standing will be strong, efficient and well positioned to respond to the inevitable surge in activity.

The big question is how long we will have to wait for that to come to pass. Notwithstanding my optimism for a 2017 recovery, we are planning for conditions to get even tougher through 2016 and well into 2017 and I would advise other industry participants to do the same.

Colin Welsh is head of international energy investment banking at Simmons & Company International, part of Piper Jaffray. He studied accountancy, economics and law at the University of Aberdeen and qualified as a Scottish Chartered Accountant with Ernst & Whinney (now EY).