When oil prices crash, small, privately held companies are the first to go under. When prices go up, small, private oil drillers fatten up like their Big Oil sector players and drill more. Except right now, Big Oil isn’t drilling.
Privately-owned oil producers in the United States emerged as the drivers behind the latest oil production increase in the country towards the end of the second pandemic year. While Big Oil worried about shareholder opinions, private drillers worried about their debts. Now, this trend has only gathered pace.
In an analytical piece from last week, the Wall Street Journal’s Gregory Zuckerman told the story of one such company, Endeavor Energy Resources, solely owned by its founder, Autry Stephens. Endeavour Energy Resources, the author noted, was one of few U.S. companies that were boosting oil output. And it was making its owner a lot of money, turning him into one of the wealthiest people in the industry.
West Texas Intermediate is currently trading above $100 per barrel. Many would argue that this price surge is a result of the war in Ukraine, and there is indeed a big war-related premium to all world oil benchmarks. However, one thing many are currently forgetting as the war hogs headlines is that oil’s fundamentals were taking it on the way to $100 a lot earlier.
Investment banks forecast oil above $100 months before the war began, and they were basing these forecasts on oil’s fundamentals, which included limited supply growth and strong demand rebound. OPEC+ has been adamant it would not pump more than it agreed to under its output recovery plan, and Big Oil has been basically shrinking its core business to stay on the good side of shareholders apparently more concerned about emissions than returns.
This looks like the perfect environment for smaller companies who do not report to shareholders to shine and, according to the WSJ report, they are shining. Data from Pickering Energy Partners cited in the story shows that Endeavor Energy Resources and Mewborne Oil Co. together operate more drilling rigs in the United States than Exxon and Chevron taken together.
Of course, Exxon and Chevron have a lot of operations outside the United States, but the local oil industry is a priority for both. However, they have shareholders to answer to and emission footprints to cut. It’s not just emissions, either.
Capital spending in oil and gas has been on the decline for years, despite fluctuations in benchmark prices. According to the International Energy Agency, spending peaked at $780 billion in 2014 and has since then been on a downward curve. Climate policies are one reason for this. Another would be post-crash caution. And then the pandemic hit the industry and amplified the caution significantly.
Small drillers are also struggling to find funding, Margaret P. Graham, chief executive of MPG Petroleum, told Oilprice.com. Private equity firms and banks have grown cold towards the industry, she explained, amid the administration’s “war on the industry at large.”
According to an op-ed in the WSJ by Paul H. Tice, an investment manager and professor of finance, U.S. energy policies and changing shareholder sentiment have caused a rethinking of the industry’s business model. The fallout of the pandemic added its own burden in the form of supply chain disruptions, which persist to date across industries.
“The main risk to the industry over the next decade is not the potential for oil and gas demand to go down because of the global energy transition away from fossil fuels,” wrote Tice. “It is the high likelihood of more energy supply-chain bottlenecks created by government officials.”
This is a problem for all oil producers, big and small. However, due to their sheer size, bigger companies seem to be more exposed to adverse government action as their plans tend to be, well, bigger than the plans of small independents.
Right now, the federal government is signaling it is willing to work with the industry to boost local production of oil, despite some mixed signals such as the White House Press Secretary’s statement that methods proposed to boost U.S. oil production were a “misdiagnosis”. Yet there is precious little it can actually do now to help the industry soon enough to make a quick difference in prices at the pump.
Yet there are also other challenges that concern both small and large oil players, and these have to do with supply chains. Shortages of frac sand, steel, and cement have been plaguing the industry in its attempts to recover from the worst of the crisis.
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The labor shortage has not spared oil and gas, and companies are having trouble finding enough workers. It’s worse than other industries, too, because in addition to layoffs that shrunk the workforce in the oil patch during the pandemic, the oil industry is also suffering from workforce aging—a problem aggravated by younger generations’ aversion to the pariah industry.
Despite all this, oil companies are drilling for more oil and smaller companies seem to be drilling more than large ones. Yet, due to the abovementioned constraints, a substantial enough output increase that would help push retail fuel prices down would take quite a while, even if all small drillers begin drilling for more production.
By Irina Slav for Oilprice.com
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