Energy is what we use, eat and live without it we are MR. INDIA.
so let’s have an overview about it.
recessions are happening faster. This recession is what I call a double black swan. We had a price war between Saudi Arabia and Russia along with the COVID-19 pandemic. And this recession is different, we have never seen a loss of more than 20 million barrels per day on the demand side of the market.
So in all the previous downturns, we’ve had some loss in demand, demand eventually came back pretty quickly, but that’s the big question in this environment:
How quickly will demand come back? And then we had the president of the US involved for the first time, actually calling Mohammed bin Salman, the crown prince of Saudi Arabia, calling Putin and getting them to come to an agreement after their fight in March. , 6th in Vienna.
And we have seen oil prices recover quickly, but not what I call, but stabilized the market, at least we are not looking at $37 minus, as we did the last week of April. We’re back in the 36 to $40 range. It won’t create a lot of activity, but it has definitely stabilized the market.
At least the people will survive. I don’t think there will be as many bankruptcies, when you see $35 to $40 oil, but we won’t see a lot of new activity, either drilling. But the big unknown that we can discuss later is the demand,
How quickly will demand come back? Most people have demand around 90 million barrels a day in a market of around 100 million barrels a day, so we’re back at 90. The big unknown is, how are they going to change the lives of people with COVID-19? Will more companies allow their employees to work from home and drive less? Also, what is going to happen to the airline industry? They use 8 million barrels per day, the world’s 100 million barrels per day.
And how quickly will we feel safe flying back as countries open up over time? Scott, thanks for that. Now, relative to you and Bruce, I have a lot less industry experience and a little less gray hair, but after the last recession, what I noticed is that the industry responded with a strong focus on boosting operational productivity and reducing costs. costs. This led to a more efficient, more efficient, and more globally competitive US oil and gas industry. Do you think there is more room to run with this trend of improving operational productivity?
And if so, what do you think needs to continue or change in relation to the workforce and the technology that the industry uses to improve this? – Yes, John, that’s a great question. As we know, at the end of the 14th, Ali Naimi, the Saudi Arabian oil minister in Saudi Arabia, decided to flood the market at the end of the 14th and he wanted to stop shale oil, he wanted to stop exploration around the world, he wanted to stop the growth of tar sands in Canada. what he did not stop was the growth of the oil shale. And so the independentista, along with a couple of majors, began to do things differently.
we moved to what we call a slippery water layout in most frack areas where it’s Bakken or Permian or Niobraraplay or Eagleford. We also started going out to 10,000 foot laterals, up to 12,000 foot laterals versus 5,000. We started moving to what they call a plug and perf design. So there are a few things that we learned to embrace in a $60 oil price market. So before we were in a $80 to $100 price market, we learned how to make money on a $60 price.
We are now in a $40 oil price market. So the question is what is left? Now, it is understood that the type curves have already reached their peak. We are not doing better wells with respect to oil production in all the various shell basins. So I think people are starting to drill closer and closer, too close to their space. And that is a problem.
We’re not seeing type curve improvements, but we’re still seeing improvements in drilling and completion technology.
For example, last year we averaged 20,000 feet of drilling, 10,000 feet down, 10,000 feet horizontal, in about 20 to 21 days, now we’re down to 16 days. We’ve drilled our last five wells in less than 10 days, 20,000 feet. And so, we’re setting goals, we’re hiring each of the drilling contractors. We have a competition going on, we have better communication, we are using geosteering. We have our geologists working with the drilling engineers. With all of that, I continue to see significant improvement in drilling and completion technology, which means we’ll spend less capital to get the same amount of production over time.
So I’m optimistic, we’re in the sixth inning in my opinion, regarding those efficiencies things. – You mentioned this before, but the industry has gone through painful processes of consolidation, restructuring, renewal, after all these recessions.
What could the world be like this time? The upstream, downstream, midstream and even the service sector? – In previous down cycles, I think the one we had the most consolidation was in ’98 up to around 2001. We had essentially half of the major oil companies gone. Our company that we both started with Amoco disappeared, ARCO disappeared, Mobile disappeared, Texaco disappeared. And so we had been through other downturns and so we got this double black swan. The problem with consolidation, the biggest problem is the fact that there was too much leverage in the industry.
So the industry was shocked by this double black swan. And so even though oil is back to $40, but when you look at the ratios, the debt to cash flow ratios of most independents and larges are the highest they’ve ever been. And then it is difficult to consolidate, with a company that has a worse balance sheet. So that’s why we haven’t seen much. The second issue that we have discussed is the issue of the investor. Equity markets were open in 2014, 15, 16, 17, equity markets for independents have been closed, 18, 19, they are closed now.
This is why investors don’t want any oil and gas companies to go to the stock markets. They have changed models so it will take time. So when oil prices come back, I think the independents will try to de-leverage.
I think most people need to blend, they need to consolidate because what has really changed, the S&P 500 energy weight was 30% in the early 80s, 10 years ago it was 15%, today it’s down to 3 ,5 %. And indeed, at the bottom of the market, just a few weeks ago, it was down to 2.5% of the S&P 500. So Exxon just 10 years ago was the largest market cap company in the world, today, not even I’m not even sure they’re in the top 20. So things have changed and we have to change our thinking.
There will be consolidation in the services sector, that is already happening, I think it will definitely happen. Consolidation must happen, but it will take time for it to happen, Bruce. -Scott, maybe pulling that thread a little more around competition for capital, as he mentioned in recent years, investors have apparently fallen out of favor with the oil and gas industry. In addition, we have seen large amounts of capital flowing into funds and companies that are viewed as having an advantage or lower risk related to environmental, social and governance issues.
In your opinion, what do you think the industry should do to win back the favor of investors and keep that favor? And then furthermore, what does the next generation of competitive and differentiated oil and gas companies look like and behave like? – Around 18 months ago, several large investors had meetings with various CEOs of the industry.
They wanted to change the model. Stop focusing on production growth. We all know that we add 8 million barrels a day, in the US, it all came from shale. And we went from 5 million barrels per day to 13 million barrels per day, we reached our peak in February of this year. And so we add, we compete with OPEC, we compete with OPEC plus, including Russia, and that’s what caused some of the recessions in 14 this year is US shale growth.
Investors want us to focus on a free cash flow model. They want to have very little growth in companies. And in fact, if you look at who owns energy stocks today, there’s no one in the growth sector who owns energy stocks anymore, there’s no one in growth mutual funds who wants to own energy stocks. It is the value, it is the dividend funds that want to buy, they are the current owners of all our shares that are public. Therefore, the focus is on free cash flow.
So I see the industry restarting growth from the days of 10, 15, 20, 25% per year, down to something like 5% per year. They want a good base dividend around the S&P 500 average, maybe 2%. And then finally the big question is, and I’ve been discussing with investors, whether to create a variable dividend. One reason for a variable dividend is because the price of our commodities fluctuates a lot. It is difficult for us to increase our base. So the majors kept increasing their base over time. And now you have Exxon yielding 7%. And if your base gets too high, freelancers can’t do that.
So we’re discussing creating a variable dividend so that when oil goes back to 60 or $70 someday, we’ll take that excess cash flow for that given year and take away our base dividend, which we pay quarterly. And then we’ll pay out that excess cash flow as a variable dividend. And I think that’s going to be the future model. Second, we have to clean up and be great stewards of the environment. So ESG, there’s been a great moment in ESG around the world and looking at fossil fuels. We know what has happened to the coal industry.
So I’ve been a big advocate of reducing burning in the Permian Basin. As we all know, the Bakken and Permian basins are two of the biggest flare-ups in US shale activity, mainly due to a lack of pipelines. We have to do a better job of planning, connecting pipelines, building processing plants, but we can’t sit back and have a big black eye about the intensity of the flare.
So I’ve been a proponent of significantly reducing flaring on all of our shale holdings, because that will affect whether or not investors will buy these stocks back at some point. –
We’ve talked a lot about oil, let’s talk for a minute about natural gas. Is there a different outlook for natural gas in your opinion? – Yeah, I still think natural gas is going to have a better long-term growth story in the world, and probably still a little bit in the US. We still use about 20% of our electricity from coal. I predict the number will continue to drop substantially, natural gas will probably capture half of that, alternative energy will capture the other half. And so we still have that potential in this country. It’s a cleaner fuel, in the US, it’s a cleaner fuel worldwide. And so, the adoption of natural gas around the world still has a bright future. That leads to the demand for LNG. We will have to continue exporting LNG. Today we have the capacity to export up to 9 or 10 BCF per day.