In our concluding Part 3 of this series, we arrive at the take-aways. Some are bitter medicine, others are rather more palatable. The dip that the Permian Basin has felt since last fall will soon go into its second year, and some “new normals” are emerging, but they’re not all bad.
by Jesse Mullins
As we reach the end of this three-parter on the impact of the current-and-long-running downturn in the price of crude oil, it’s encouraging to be able to say that we’ve encountered some glimmers of hope amid the tumults and turmoil that have marked the past many months.
We’ve referred to this article series by more than one name. We’ve called it “Bowed But Not Broken.” We’ve called it “The Big Cleanup.” We’ve called it “Dealing with the Downturn.” By whatever name, it has been an inquiry into the issue that is on everyone’s mind. Years from now, 2015 will be known as the year of a metamorphosis in the Permian Basin.
We are indebted to Midland businessman Ken Goldsmith, founder of Mudsmith, Ltd., who recognized a phenomenon that was unfolding in the Permian business world and brought it to our attention. It was Goldsmith who coined the term “The Big Cleanup,” and it’s been an apt metaphor, and we start (and will close) this last installment by sharing the thoughts of this individual.
“This ‘Big Cleanup’ process has been a real eye opener for me,” Goldsmith said. “I’ve learned a very costly lesson—a cost of at least $1 million real dollars—of what trusting people completely can cost. My critics might say that my error was not ‘trusting completely,’ but rather hiring the wrong people or keeping the wrong people employed too long. But, how often do you hire right? They might say I failed to provide proper training. But the real lesson I learned is, “trust, but verify.” and verify often. So, does that mean trust no one? Heck, I don’t know. All I know is that business is very risky. You can think you’re doing very well and suddenly learn that you’re not.”
In his defense, it should be said that Goldsmith is one of those Permian businessmen who has navigated these straits efficiently, all things considered, and is emerging from the storm in better shape than a lot of other businesspeople. This we learned from Goldsmith’s banker Jeremy Bishop, who also is cited in this piece.
It seems that everyone has offered some views on the lingering effects of the plummeted price. Chevron CEO John Watson, in a May 21 interview with Business Insider, said that he expects this year to be a big shakeout year.
“This is a tough year because there’s been momentum in the spin but you’re seeing rig counts [down],” Watson said. “You’re seeing activity slow down. So 2015 is likely to be pretty choppy, and you’ve seen that. I think that we’ll get into better balance in 2016, and I think you’ll see some price recovery. Where it ends up ultimately, reasonable people could disagree on.”
Watson remarked that Chevron has “a big presence in Midland,” adding that, “we go where the work is.
“What I’ll tell you is a lot of the big projects aren’t going to get started with the current cost/price relationships that we’re seeing,” he said. “Once that momentum works through the system and the spending effects start to be felt, you’ll see prices recover.”
Watson urged taking a long-term view. “We’re still spending $35 billion this year on new projects,” he said. “We are continuing to spend, but we all have to strike that balance between what you want to do to invest through the cycle and what you need to do to balance the near-term financial priorities.
We’re continuing shale drilling, for example. We have a great position in the Permian Basin in Texas and New Mexico and we’re continuing to invest when others are cutting back because we think it’s economic to do so.”
Jeremy Bishop, branch president of the North Big Spring Branch (Midland) of First Capital Bank, was asked what he has observed in this down cycle that has surprised him. He replied:
“First, I think the title of this series, ‘Bowed But Not Broken,’ fits the situation to a T, because, yes, while the bad part of it is that the oil price is down and people have lost revenue on the oil and gas properties—and service companies have lost because there’s less drilling—still, the Permian Basin is very resilient. The people here are very resilient. So they find other ways to make it work. We’re dealing with folks right now who are saying, ‘Okay, so the price of oil is down, so horizontals don’t make sense—there’s still plenty of vertical locations to go out and drill.’ And so they just find things that work and find things that will give them a return, and make it work, even when the price of oil is down.”
Bishop seemed in agreement with most other sources PBOG has spoken with, when it comes to the question of “Who has been hurt the most?” Bishop indicated that it has been the companies with the most debt that have been hit hardest.
“It’s been the folks who borrowed too much money and got over-levered,” he said. “But community banks like ourselves, we watch out for the that. We know that going in. That’s why we require down payment. That’s why we structure things appropriately. We’re here in the oil and gas industry. We’re here in the Permian Basin. We know—we’ve seen the ups and downs. We know what we’re up against and so we try not to lend people into trouble. We try to help watch [and protect against] that. You see a lot of this out-of town-money that comes in just because there are people who see the oil and gas boom and think that they can get a big return. Well, they don’t know the market like we do, here in town, and so that’s dangerous waters for them. That’s where I think we’ve seen the most hurt.”
Asked if he felt that service companies have been hit harder than E&P companies, Bishop said not necessarily.
“Our service companies that we bank have done very well,” he said. “In fact, I’ve got two companies that are in the process of expanding. What’s happened is they’ve minded their p’s and q’s. They’ve done what they were supposed to when the times were great and they’ve set money aside.”
Bishop acknowledged that the opportunities (and, equally, the need) for mergers and acquisitions has arisen because of the downturn, but he said that that activity has not ramped up yet, not excessively, anyway, because to this point companies have been able to meet costs. But as we get deeper into the second half of 2015, that can change.
“It’s just now getting to the point where you’re starting to see the mergers and acquisitions activity heat up,” he said. “Back in the early part of the year, oil had only been down for a couple months, and generally folks have enough staying power for three to six months, maybe, to weather a storm, but once you get past that, then it starts really hurting. And people will say, ‘Okay, now we’re going to have to sell some assets or we’re going to have to find another way to make it work.’ Which then leads you into the mergers and acquisitions. I think right now, in the last couple months, we’ve started seeing that kind of heat up, that activity.”
In Lubbock, one of the biggest oil-related businesses has weathered the economic storm in better-than-average fashion. Standard Energy Services, which is more than just a Lubbock business, having offices in 17 locations in West Texas and East New Mexico, employs some 400 people and appears to be thriving. Their staff peaked at 460 at the height of the boom, but company founder Pieter Bergstein is happy to be settled in with 400 employees and is making the most of current conditions, which offer some bargains that didn’t exist last year.
Bergstein said that the biggest adverse impact on Standard has been on the well servicing side. “Our well servicing division slowed down more than our trucking division,” he said. “As a matter of fact, our trucking division actually got busier over this year.”
Why better?
“I think companies are looking more now at established companies with a better safety rating. Our company enjoys a real good safety rating. Safety is a big thing, and now that people have more time to select which vendor to use, which service company to use, they see that they have better prospects and they are selecting the companies with the best safety ratings and practices.”
He cited trucking as Standard’s biggest division. “It’s trucking—for water services, water hauling, vacuum trucks—and then the next-largest segment is the well servicing division, and then the disposal division. Of course, frac tanks came almost to a screeching halt. Nobody is renting any frac tanks.”
Asked if the reduction in drilling activity has affected Standard, Bergstein said yes. But businesses have compensated in other ways.
“In the older fields, we’ll see some of the yards taking up some older wells and working them, because [people aren’t] spending so much money on drilling,” he said. “We still see a lot of drilling going on in New Mexico. New Mexico has hardly been affected by the slowdown. A lot of people hedged their oil prices and they’re still receiving $80 to $90 dollars on a barrel of oil. They’re taking advantage of the cheaper service companies’ prices, like a drilling operation’s reduced prices, and they’re doing so because they’re still getting a good price for the oil until maybe the end of this year.”
Bergstein has seen a lot of ups and downs in the industry since his entry into it decades ago. “I started my business with one truck in Post, Texas,” he said. “And now we’re running 1,200 units. By units I mean trucks, trailers, pulling units, pickups.”
What are the prospects, moving forward, for Standard Energy Services?
“I think we’re going to go forward and be steady,” he said. “As a matter of fact, we expanded a little bit this year and renewed some of the equipment, because we took advantage of some of the manufacturing companies dropping their prices. A lot of people get affected. It’s just not the service companies. It’s the manufacturing too. The manufacturers had excess equipment, they dropped their prices, and we got vacuum tankers cheaper than we ever bought before. We bought 30 tankers this year. We saw a discount on trucks and we took advantage of that, and we’ve bought 50 trucks, altogether, this year so far. These are going to be replacing some other trucks. They’re not going to be really adding to the fleet—we’re just going to update the fleet.”
So much for reports from the field. The consensus is gradually coming in, and it’s that life goes on. The world isn’t ending… not yet, anyway. We turn to Ken Goldsmith for a final thought, and Goldsmith, who is known for his sayings, his Ken-isms, cites instead someone else.
“I subscribe to this quote from Dr. Robert Schuller,” Goldsmith said. “He [Schuller] said, ‘If I know all the answers before I get started, some of my answers are wrong!’ So, the lesson in this is, “Success in business requires perseverance, alertness, a dogged determination, and faith.” We must be open to learn the valuable lessons. The cost of each lesson is the investment we make in the wisdom required to be successful. And, my personal belief is, I’m just not that intelligent, or that wise, in my own strength. Therefore, I lean very heavy on my faith in God to protect me from harm and show me the way. I’ve learned that God has a sense of humor. While He knows how it’s all gonna play out, He only shines the light on about the next two or three steps for me. I’ve learned that in order for me to continue to receive His guidance, I must take those two or three steps ‘in faith,’ and then He shines the light on the next few steps. Should I run, or should I walk?
“So, I think I understand the concept of ‘Bowed but not Broken,’” Goldsmith concluded. “Those who wait on the Lord shall renew their strength. They shall run and not grow weary. They shall walk and not faint.”
Q&A: Ken Goldsmith
PBOG: In this industry downturn, have some kinds of companies been hurt more than others? It seems to us that the service sector possibly has been hurt more than E&P. Anyone who is holding production is hurt by a lower price. Their income is cut in half. But when drilling stops, some service companies’ income is not cut in half. It can be cut completely—100 percent. That’s why the question, Who is hurt the most?
Ken Goldsmith: I’m not sure that service companies are hurt worse than E&P companies. If any company was over-leveraged by debt, their cash flow may not be sufficient to satisfy their bankers. If an E&P company leased a large acreage position at, say, $5-15,000 per acre and has little or no production, I’d think they were in trouble. If a service company was too dependent on one customer, or too drilling-specific, they might be in trouble. So, debt management and diversification are the keys to survival in a down market.
PBOG: Are there any signs of recovery?
KG: The oil price has only partially recovered, and it isn’t showing any signs of returning to $70 or above anytime soon.
PBOG: Or are there signs at least of restructuring/realignment? What good things are happening?
KG: There has been aggressive restructuring and realignment. Every company I talk to has worked very hard to right-size their business, and reduce operating costs. This has enabled serious and committed operators to drill, complete, and work over wells. There has been a paradigm shift towards looking for better and more cost effective methods, as opposed to the “Just get it done” attitude of the boom. This is refreshing for the solution providers. People are looking for solutions.
PBOG: Was this a different kind of “bust” than the Permian has ever known before?
KG: I suppose that depends on how much gray hair you have. If your oilfield career started in 2010, then yes, this is the worst ever. If you started 30, 40, or 50 years ago, you’ve been through it. The question is, “Did you learn anything from those prior busts?” Personally, we knew we had to be diversified and we knew we better not be too heavy in debt. Even so, we had more debt than I intend to have going into the next bust.
PBOG: Was this less predictable than prior busts?
KG: Many of us were predicting it, but few of us knew just how far it would drop, or where the bottom would be. I think—I hope—we’ve seen the bottom. If this is the new normal, we can live with this.
PBOG: Can this cycle help de-risk (so to speak) the Permian marketplace, where future busts are concerned? Maybe instead of saying “de-risk” we should say “inoculate” or “solidify.”
KG: It should, but there’s a whole new crop of idiots born every day. And, there’s an aging generation of wisdom who won’t be around to “do better next time.” For many, this was the last Rodeo.
PBOG: Have you heard or witnessed a story about a company that was well prepared for this cycle?
KG: I’m not sure how well prepared we at MudSmith were, but I’m predicting we will be one of the few service companies who finish 2015 with equal-or-greater sales than in 2014. I’m very proud of our diversity of services and our broad base of good and loyal customers.
PBOG: What does the future hold?
KG: I think the future is good for those who learn and grow from this experience. Remember, “Good timber doesn’t grow with ease. The stronger the wind, the stronger the trees!”
Jeremy Bishop
Q&A: Jeremy Bishop
PBOG: What sorts of things are your [bank/borrowing] customers doing to survive this downturn?
JB: We [that is, the Permian Basin] have drilled, I can’t tell you, how many wells over the last five or six years. They all need to be serviced. They’re all producing. They all need workovers. Tanks get holes in them—they need to be replaced. There’s lot of work here to be done and folks here just seem to be digging in and finding what needs to be done and doing it.
PBOG: Would you say that there is a backlog of pent-up work here that, because of the big boom, sort of got “put aside”?
JB: I think so. I’ve heard from numerous people that they’ve drilled a lot of these wells and, because of the sharpness of the fall—when the price fell, it fell so quickly, so sharply, in relative terms, over 90 days or so—there were folks that had finished drilling and decided not to complete those wells. A couple months ago there were 300-or-so wells in the Permian Basin that had not even been completed. And so those frac’ jobs, those completion jobs, are now coming back into play, and that’s work for these folks, these service companies, who hadn’t had that work yet. So there are still things to be done. Like you say, it’s “pent up.”
PBOG: We’ve heard those wells referred to as “DUCs,” that being an acronym for Drilled, left UnCompleted. So you’re saying those are becoming an important factor now?
JB: Yes, and it’s two-fold, because, one, you want to complete it, at a higher price, so they’ve held off. Back when oil dipped into the low 40s they were saying, “I’m not going to complete this well.” Now, oil is back up in the 60s, so they’ve had a 50 percent increase from the 40s. You’ve added 20 bucks to it, so they’ve had quite a bit of increase in price, but meanwhile [and here’s the other part, the “two”] the cost of frac’ing the well and the cost to complete [has shifted] if we compare these costs as they were nine months ago, or even six months ago, to today. Nine months ago these costs were astronomically high and these service companies have [since] had to cut costs and lay people off—yes, that’s a sad part of the business but it’s also part of the business—but [the upshot is] these costs to complete the well have come down.
PBOG: So they’ve been able to “meet in the middle”?
JB: Yes. You catch it from two different angles. One, the cost [of completing the well] is cheaper, and then, secondly, you’ve waited a little longer and the price has gone up, so the return is just much better on those wells.
Q&A: Pieter Bergstein
PBOG: Were you doing anything to prepare your company for this setback or decline?
Pieter Bergstein: It’s funny you should ask that. July of last year, I had a meeting with a big bank. Wells Fargo came to visit with me. We do a lot of business with them. They said, “Boy, it’s good,” and I said, “You know, better hang on, because I don’t think it’s going to stay very good for very long.” They were surprised. They asked, “Why”? I said, “Wherever I go—I have an office in San Angelo, in Big Lake—I see some huge wells being brought in. All these oil companies are making so much oil. I go to New Mexico and they’re bringing huge wells in. What used to be a 25 barrel well—now they’re bringing in 500 barrels to 800 barrel wells. As many as these companies are putting in, eventually we’re going to have an oil glut. There’s going to be a surplus.” I just saw that coming. Then they asked me, “What are you going to do about it? Are you going to be prepared when that happens?” I said, “Yes, we already have a contingency plan in place—what we’re going to do, how we’re going to cut back.” In September and October, we already had a contingency plan in place in case it would happen.
PBOG: Can you tell us a little bit about the plan? Can you tell us something you did?
PB: Yes. We’re fortunate that all of our pulling units are paid for. We don’t carry a note on the pulling units. We’re financially pretty strong. What we were going to do first is we identified which units cost us more to operate versus another unit. We would shut those units down first, and bring them to the yard and stack them out. Then the next step was, “Okay, we’re going to look at the wages and see how much we have to go down on the rate to keep things working.” We got agreement on [we got workers to agree to] some wage cuts. We adjusted the wages. We also went to our vendors—we had that already planned—and we said to our vendors, “If business is going to slow down according to what we predict, we want you to get ready to take a hit and help us on better and deeper discounts.” We also were cautious about our expansion. Back last year, our company did not expand, even though the temptation was out there, because last year the business was there [was available]. But we played conservative. We discussed the situation with Wells Fargo, telling them it looked like it could turn any moment. Because, based on what I saw with my customers, they were producing so much oil. And if that was just going to go on in the Permian Basin and in eastern New Mexico—which together are really the heart of the U.S. oil industry—and then of course the Bakken and Eagle Ford were having the same thing—well, we were going to see a glut of oil. Which, I hate to say, we did. We had a glut. I wish I was wrong, of course.
PBOG: But you were right, and that’s exactly what happened. And you didn’t want to get overextended…
PB: Right. I saw a lot of my competitors and people, new competitors coming on the block, borrowing a lot of money, because money was plentiful and cheap. They started buying a lot, and they are now in a lot of debt compared to our company. We have very little debt. Because we got hurt in 2008 and 2009 where we had a lot of debt on the books and the oil fields slowed down. Sometimes you have to get hurt and learn from the school of hard knocks, you know? [laughs] So we decided to play this out. We’re happy with the size of the company we are. We’re happy with the employees we have. They’ve been very loyal. Top management has been around. Our management—we have very little turnover in management—they’re all happy. We don’t want to be a big company like some of the competitors, like Key, Globe, Basic. With bigger, sometimes you get bigger problems.