How to Survive an Oil and Gas Bust
Kansas Crude Prices Plummet Amid Confluence of World Events
A game of international hardball has combined with the global COVID-19 pandemic to drive crude oil prices to the lowest levels in 30 years, and Kansas oil and gas companies – which already operate on lean margins – will have to tighten their belts even more in order to survive.
It is a lesson in the importance of strategic contingency planning that all business owners should engage in, but which few actually practice.
As of March 19, the Kansas Common Oil Price was $10 a barrel. Just two weeks earlier, it had been over $30, and was more than $50 for most of February. Long-time oil and gas industry insiders say they haven’t seen prices this low since the mid 1990’s, and many companies cannot function profitably at these prices.
The sudden bust can be traced to a confluence of world events – the COVID-19 pandemic and a longstanding dispute between Saudi Arabia and Russia that has turned nasty.
Saudi Arabia and Russia have had a tense alliance in recent years as the U.S. has shot into first place in terms of crude production, thanks to the shale oil boom. The Saudis have pressured other oil producing countries to cut production in order to boost crude prices, which have been depressed due to sharply rising U.S. production. The Russians in recent years have cooperated by cutting production to try to counter shale’s impact.
That cooperation ended last week when Russia declined to sign on to production cuts to offset the collapse in demand from the spreading COVID-19 outbreak. Saudi Arabia responded by removing production cuts already in place, threatening to flood the market with crude. The impact was immediate as crude prices plummeted worldwide.
Surviving the Bust
It is impossible to know how long prices will remain this low, but Kansas oil and gas companies should hunker down and prepare for the long haul. Here are some strategies that may help you through the crisis:
- Keep lifting costs as low as possible. Maintain the wells but don’t incur any workover expense or make costly improvements.
- If you have to lay off workers, do it sparingly so you can keep functioning. Consider the Kansas Shared Work Program, which pays partial unemployment benefits to workers whose hours have been cut anywhere from 20 percent to 40 percent, but who have not been fully laid off.
- If you’re not heavily leveraged, consider a bank loan or a Small Business Administration loan. Bear in mind that SBA loans are not available if you’re wildcatting; you must have a proven reserve report from a qualified engineer to back up your loan application.
- Keep your business as lean as possible but keep your operations going.
There is no one-size-fits-all solution to surviving a bust in the oil and gas industry. Every company is different. But times like these are a reminder that strategic contingency planning is essential for companies in such a volatile industry.
Strategic Contingency Planning
Once we’re past the current crisis, prepare for the next one – because you know another one will come one day – by creating a strategic contingency plan for your business. Three essential parts of a strategic contingency plan in the oil and gas industry are:
- Debt load. When disaster hits, you don’t want a lot of debt on your books. Keep debt to a minimum as much as possible.
- Many Kansas oil and gas companies have been slow to adopt technologies that could help them operate in a leaner fashion and better survive difficult times. As part of your strategic contingency plan, invest in the technology resources that are available. The cost-benefit can make the difference between survival and business failure during a bust.
- Cash flow. Protecting your cash flow and relationships with investors can shorten the time between daily extraction operations and payment for production, freeing up precious cash for operations. Examine your existing payment terms and see if you can negotiate with your top customers for faster payment.
Contact us for an operational review to determine how you can best make it through this oil and gas bust, and how you can prepare to weather the next one.