We share below the full transcript of James Wicklund’s talk given at the April 1 membership luncheon of the Permian Basin Petroleum Association, held at the Midland Petroleum Club. We apologize that in a few spots there was a word or phrase that we were unable to transcribe, and if you will check back in a few days we expect to have that remedied.
Scott Kidwell, chairman of the Permian Basin Petroleum Association, introduces the day’s speaker, James Wicklund:
Scott: “Jim is the managing director of investment banking at Stevens Inc.. He’s had a career in geophysics, engineering, and operations in the oil and gas industry. He spent four years managing a broad energy investment portfolio and decades of following the industry as a senior research analyst. He spent 15 years in the oil and gas industry working in geophysics and engineering all over the world. Australia, Singapore, Milan, London several times. He’s been with Western Geophysical, he’s been with Sunoil, and then got into the financial services industry as a research analyst covering the oil services sector.”
James Wicklund takes the podium.
James:
Thanks Scott, thanks Ben [Shepperd]. What he [Scott] was trying to say is I’m a Jack of all trades and master of none. That’s the most accurate. Thank you all for, Ben and Stephen and everybody, for letting me come do this. An in-person meeting. This is the second one in a year I’ve been to. I will tell you that all of y’all are much more sober than the first one I did. [laughter] It was until… No, it was lunch. It was lunch, I think, and you are still more sober than they were. There’s still time to fix that. It’s early in the day.
I’ve got a good friend, Marshall Adkins, who’s been saying oil’s going to go south. He’s been saying that for about 12 years, and occasionally every couple of years he’s right. He said, “Jim, how come you don’t predict oil prices? I said, “Well, I’m either too smart or too stupid.” I don’t know, but I don’t predict oil prices because you’re always wrong, right?
But I want to give you a little bit of a backdrop before I go through some of these slides. Okay? Right now, Saudi Arabia produces about 11 million barrels a day. It’s less than that because of the OPEC plus reduction. They’ve got 7 million barrels OPEC plus offline right now, because they can put it back on the market when they see fit. Key point. But they can produce 11 million barrels a day. Okay? They can produce 11 million barrels a day for 100 years. We’re at about 11. We can’t do that. We don’t have the reserve to do that for 100 years. They do.
So now, economic question. If you have something, if you have 100 year supply of something and everybody alive tells you that demand for what you have will be zero in 30 years, what is the only financial action you can take? That is to sell as much as you can in those 30 years. As much as you can. They have no other choice.
Now, we’ve got plentiful natural gas – we’ve got 100 years of natural gas at cheap prices, and that’s positive. Russia’s got loads of natural gas. Saudi’s been trying to drill for gas for years and has broken their pick just about every time, and their gas is always [inaudible 00:05:54]. is minimal. They’re an oil country.
So when you think about it, what’s going to happen? As an engineer, we’re always looking at pressure and volumes and everything works toward equilibrium. Everything in life. Right now, the oil markets are trying to find equilibrium. We’re all thrilled that oil is at 60, and we should be. Beats the shit out of -37. Right? At some point, we’re going to find on a global basis, equilibrium. That equilibrium is going to be an oil price where the US doesn’t go nuts again and oversupply the market, and where Saudi Arabia can produce as much as it can and take up most of the growth.
Say they grow their production to 15 million barrels from 11 and we stay at 11. That is a very realistic scenario, considering that our lifting costs are more than their $5 a barrel lifting costs. Strictly economics. Economics always drives toward equilibrium, right?
Okay. So the reality is, when people will say, “Gosh, if we could just get it back to $90 oil, boy, we’d rip.” First of all, Conoco now, but any of the public oil companies, none of them can do it. Their owners won’t let them. I’m going to show you an example why, but trust me, they won’t let them {rip}. You’re allowed to spend 70% of your cashflow. The rest of it has to go towards debt reduction and return to shareholders. Don’t get me wrong. If you have $90 oil you have more cashflow. So I won’t say that activity won’t go up, but then it’s going to have to hit $90 before that happens.
For most of the last 10 years, the industry spent 120% of cashflow. Let’s say oil averaged 65, which it did. Going forward, if you’d only spent 70% of your cashflow, oil has to go to $93 a barrel to have the same capex that we had at 65. In terms of activity, that’s what has to happen. At $90, we probably would go nuts. But keep in mind, if oil prices got to 70 or 80 or 90 and activity goes nuts, that almost guarantees that we will be back to $30 oil in 18 months. We will do what we’ve done several times in the last six years and the US will accelerate drilling, over supply the market, and prices come down.
Now, who got out last time when oil was 149? Who got out last time oil hit 85? Or 70? No hands are going up because you don’t work for hedge funds. The only people who really benefit longer term from high oil prices, or spikes, I’ll say, in oil prices, are short-term investors. You guys don’t sell. If your stock price goes through the roof, unless you sell a bunch of stock to somebody. At that point, most of the investors are looking to leave, not get in. If you sell stock in a public company, then all the investors think that you know something. Scott dumped stock in Concho two years ago and everybody goes, “Holy crap. We see the filing. He knows something we don’t know,” and everybody sells Concho stock.
The only people who actually benefit from a spike in oil prices are short-term investors who have the ability to sell their stock tomorrow on the hype of the stock. What we do as an industry is we act passive. I want to start adding pressure companies capacity, rig capacity, and I’m doing that as oil is going to a peak. We know what happens on the other side when we have over capacity like we do today.
If you go back to last October, I remember looking at an oil price that had been going up for five years and the <<< future strip chart ?? >>> is going down for five years. So if I looked at a chart of 10 years of oil price, five years past and five years future, we were at the very, very top. Now, I believe if I told you buy low and sell high. So when the oil price correction happened, who could have been surprised? Again, how many people sold out in September of last year? Nobody. We don’t do that. The hedge funds do.
So when you start thinking about we’re going to get bailed out by a spike in oil prices, we don’t get bailed out. The industry does not get bailed out by high oil prices. Again, if you think that if oil goes to 75, then the Conocos and the Pioneers of the world will lose this discipline and start drilling, this is not self-imposed discipline. This isn’t discipline being imposed on them by their owners. I’m going to show you in a minute [inaudible 00:10:57].
James Wicklund:
I work for Stephens, We’re a privately owned investment bank. Having worked for big banks for the last many years, this is a really refreshing change. We don’t have to do business with people we don’t like or trust, as opposed to a public bank, which has to do business with anybody who can pay the bill. And as an analyst, having been a geophysicist and engineer, I always felt it was my obligation to be straight-forward and honest. Then downturns and when things aren’t going well, nobody wants to hear from me. They want to hear from Marshall Adkins saying, “Well, it’s going to be $70 tomorrow.” He may be wrong, but he’s a lot more fun to listen to.
The good part today, though, is I’m going to be fun to listen to because I’m optimistic. Now, I don’t know if y’all saw the news today. Anybody see this earlier today?
[Slide 3]
That Schlumberger and Halliburton are going to merge? $100 billion company. It’s going to huge. I can see some surprised looks on the faces. That’s good because it’s April Fool’s day and I have to pull this on somebody. [laughter]
[Slide 4: Stark Realities}
Okay. Okay. There’s a couple of realities of the market. Oil prices will be whatever they need to be so that supply and demand are met. That’s my oil price prediction. At $250 a barrel, we have too much oil. At $5 a barrel, we don’t have enough. Somewhere in there is my famous equilibrium and we’re looking to find it.
Losses for the sake of production growth aren’t going to be subsidized anymore. I’m going to that on a later slide, so I won’t do it now. This next one is important. Everybody, bitches about Biden. You shouldn’t. Yes, they’re passing regulations. Yes, they’re restricting things. Boy, that raises our costs, doesn’t it? When the cost of producing oil goes up, the price of oil goes up. For the last 50 years, the oil industry has made more money under Democrat presidents than Republican presidents. The only exception to that is Bush II, and it has nothing to do with politics. Okay?
So while many of us may not like a lot of the things Mr. Biden is doing, I remember when man camps used to hold oil workers, not immigrants. I don’t like a lot of the things he’s doing, but don’t think too loudly. I mean, don’t get me wrong. If you are drilling on federal lands in New Mexico, you’re not terribly happy. That’s 8 percent of production by the way, is in federal lands. But if you’re the other 92%, you think it’s a great idea, right? You can take 8 percent off the market. How does that tighten up supply and demand? All I have to do is bitch about Biden and feel sorry for my friends and win. So it’s not all bad. So when everybody grimaces about what they’re doing, what it’s going to cost and all that kind of stuff, ultimately we win on that regard.
Gasoline is the least efficient thing we do with oil. You can burn oil to generate electricity, but even Trinidad has quit doing that. So what’s going to get phased out first is gasoline. There’s electric vehicles, which still take natural gas as fuel. Or, as you can see down at the bottom, if you own a Tesla in Dallas, it means that we’re burning more coal to fuel your car. This is a fun thing I can tell my friends who own Teslas in Dallas, who are eco-friendly. Thank you for making us burn more coal. Appreciate it. Your fault.
But gas as a transportation fuel will be the first thing to be phased out. Petrochem, there’s a fabulous video out. I’m going to find it and try to make it go viral. But it’s a guy waking up in the morning and all of a sudden anything with petroleum in it disappears. So his house is gone and he’s standing there naked. Believe me, the video is better than I just explained it. But Petrochem – oil – is in everything that we have on. In our phones, our lenses of our glasses, everything. We can’t live modern life without oil-derivative products. Gasoline is the least efficient of the things we do. So it will be the first thing to get phased out, but we are not going away.
Then LNG [liquified natural gas], natural gas. Natural gas and LNG had a horrible summer. We had 45 cargoes canceled in August. Cargoes in the North Atlantic. After shipping it down to the Gulf coast, liquefying it, putting it on a ship, and taking it into Asia, it was then sold for what they paid for it at [EmCo 00:15:47]. So the gas market, LNG global market, was horribly depressed. Now it’s gone from $20 to $30 mcf.
Oil has recovered to $60, gas has recover from its lows. Activity is moving up. Here in Midland, I’ve so far taken two Ubers, three Uber drivers so far and they ALL tell me the economy is definitely getting better. And who better to know than an Uber driver? [laughter]
[Slide 5: Who Wants to Play?]
So who wants to play? The E&P industry can’t survive without access to capital, right? You have to have money to drill. The timing of the cashflows could be an issue, so some advance is required. But I mention, investors, they typically rented their stocks. They’re cyclical. Cyclical means it goes up and down. So if you own it here and own it for five up and downs, you end up with the same amount of money over six years.
So, The people who usually trade or invest in energy stocks, trade them as opposed to… <<< unintelligible >>> buying. This is what I meant. If oil prices spike, they cash out. They’re thrilled to death. But all we’re going to do when oil prices spike is accelerate the demise of the oil industry because the Progressives, especially considering the political climate, will seize on that as another example of why we need to accelerate solar and wind. So the best thing that can happen to us, frankly, is a stable oil price somewhere up right where it is.
The next point… We did a study of 21 E&P companies, public E&P companies, Concho was one, that were public from 2010 to 2020. That encapsulates the oil shale boom. Remember, it didn’t start until after the ’09 correction. So that gives you 10 years of the U.S. shale boom. All 21 companies that were public during that period of time. During that 10 years, seven years they outspent cashflow. They outspent cashflow to accelerate the creation of value. That’s what you do, right? Over that 10 year period, those companies lost $100 billion in value. Oops. They lost 36 billion in net income. So if you would have invested money in the E&P industry in 2010, in 2020 you would have 87 cents 10 years later for each dollar you put in.
Now, I don’t know if any of you guys are willing to do that again, but if you are, I’m starting an oil company. You start writing me checks as soon as lunch is over. And in 10 years, I’ll get you your 87 cents back. [laughter] Okay?
Basically, investors subsidized money-losing oil and gas operations for 10 years to get us to 13 million barrels. They aren’t going to do that again. If we had done it for a year or two… or… We did it for 10 years. We outspent cashflow for seven out of 10 years. Now this is what I mean. If you’re investing in a widget company, but the widget company can’t afford to restock its inventory with its cashflow, what is the value of that company? Zero. Okay?
So the reality is, if you can’t make money at $60 to $65 oil, you’re more than likely going to go out of business. I don’t mean to be rude, but that’s what is likely to happen.
These days, investors will only give you money if you promise them a positive return on their investment. Now, most investors feel that way. I’ll invest in something as long as I’m going to make money and you’re going to give me back more than I gave you, right? For 10 years we didn’t do that, and all the investors know it. Now, that’s investors being banks, individuals, pension funds, Fidelity, Wellington, everybody. So, until we start having a positive net income, which is required to generate a positive return on invested capital, nobody’s going to touch this sector. I’m not through with that. If you don’t at least earn your cost of capital, and [return] some cash [to] investors, nobody’s going to give you money.
[On the slideshow, the topic shifts here to a point about the OFS (Oil Field Services) sector}:
Scale matters in a consolidating market with more than 45 other oilfield service companies with market caps under $200 million. That is, today, in the investment world, a “friends and family” company. So, very few companies have scale. I was having dinner, two nights ago, with a large oil and gas investor. There’s still a couple of them left. He said, “In the oilfield service sector, there’s only three stocks he can buy.” And I said, “So, there’s only three stocks you’re willing to buy?” and he goes, “No, there’s only three stocks that have marketing caps big enough that I can buy.” So consolidation has to happen from the very smallest companies to the very largest companies, but that has to be the trend going forward.
[Slide 6: The Sector has Struggled]
I told you I was going to be optimistic, but I have to get there. In the last five years, with bankruptcy, you all know this, we’ve done amazing things to the industry. The problem with the bankruptcies is, we haven’t solved a lot of problems. Usually, when Clint [Walker – here he is having fun with CUDD CEO Clint Walker] goes bankrupt [which CUDD did not], he gets thrown out of the company. The company gets liquidated, all the assets get recovered or thrown away and he’s out of the market. So the rest of us win and all go home. But Clint knows <<<< unintelligible >>>> he doesn’t have to sell a thing. He writes down the value of his workover rig fleet… I’m using this example, I’m [inaudible 00:02:24] that. And now he can generate a higher return at a lower price than the other companies can, because he’s got a lower base, going through bankruptcy. So this time, bankruptcy is actually not being healthy for the industry… and look at [refers to chart] where it’s at [how much bankruptcy there has been].
[Slide 7: Need a Job?]
Speaker 1:
Okay, I need a job. This is Texas Employment, and this was from a year ago. So keep in mind, it was sluggish before COVID. I don’t have the latest of how far down that was, but you can see what the employment in Texas and the Permian is doing. We fared much better than the overall state of Texas.
[Slide 8: What Recovery Looks Like}
This is what a recovery looks like. And you can see again, there’s the U.S., Texas, the Dallas-Fort Worth area – this is from the Dallas Fed. So Texas fared relatively well. Now my point is, the bottom. If you fall from the building from the seventh floor versus somebody else falling from the 10th floor, it doesn’t really matter, you die, right? [laughter] Just because we didn’t drop down as far as others, doesn’t mean it was a good thing. But in a relative world, there were people worse than us. That’s got to be one of the sharpest drops in any kind of chart you can show in economics. We had oilfield service companies that sequentially lost 82% of revenue. Quarterly, an 82% drop in revenue. That doesn’t happen in any other industry, but our own. But the recovery has been just a sharp and, as my Uber driver’s testified, it’s definitely getting better in Midland. [laughter]
[Slide 9: Lift Off (at a fairly low angle slope)]
Okay. This essentially shows what we’ve been doing lately. The left chart shows where we’ve been in the last seven years. You see how low we are. We have the lowest rig count since Abraham Lincoln was president. [laughter]… There were more rigs running when Abraham Lincoln was president than we had running last year. Then you see on the right-hand side [of the slide] the recovery this year. We can argue about the slope of that recovery, but the fact that it’s a positive angled slope is a really good thing. The rig count is a shell of its former self. The biggest issue here… I will show it better on another slide…
[Slide 10: We Aren’t Going Back to the Old Days]
Okay, we aren’t going back to the old ways. In many ways. Finance, size, different things. But we have been trying to get rid of people. We are trying to get rid of non-productive time. We’ve been improving the technology we put downhole, for years.
We’re now looking at the technology with which we run our businesses. But it’s just like when $15 minimum wage was forced on Portland and Seattle. All the fast food restaurants said, “Boy, that’s terrible. You’re all fired. Here’s a little computer kiosk. They never get sick. They’re never late. They don’t ask for vacation.” Automation. Remember how hard it was to get people about 18 months ago in Midland? And everybody said, “Boy, we’re just going to be hiring people like crazy.” What you actually do is forcing acceleration of automation and that, combined with the technology. We’ve all definitely see that. So doing more with less [and] automation increases efficiency. That’s what we’ve been working on for the last six years and it’s stunning how good we’ve gotten. And this is what I show here. At the top you can see your drop in the gas rig count. We had 1,606 rigs operating, drilling for gas, in 2008. 10 years later, we were at 79. 1,600 to 79. During those 10 years, natural gas production went up every year. That’s doing more with less. That’s getting more efficient. That’s getting better.
We can’t do the same thing with oil, quite. Not as much energy, larger molecules, there’s a number of different reasons. That just means that it won’t be as dramatic, but 1,600 to 79 is pretty flipping dramatic in my book. You can still be less than that, it’s still pretty difficult. But the point here is that, going forward, the goal is not going to be to try and grow production or grow the rig count. Production will eke up, as economics allow. Activity will eke up, as economics allow. But the goal of the industry has to be different. Instead of growing… Remember when y’all were 18 and 19, and you’re making a mistakes we’re not going to talk about [laughter]… Then all of a sudden you look up one day, and you’re 52, and have a family, two kids in college and those wild times are only a memory.
[Slide 11: Energy Stocks are No Longer Growth Stocks]
That’s the same thing that’s happened to oil and gas industry. The wild and woolly days of the past have fallen behind us. We could always point to increased growth, but now we’re talking about increased growth as most of the world is saying, “We’re trying to faze you out as fast as possible.” So the point is, we have to do something different and we have to learn how to run profitable businesses. Doesn’t sound like much, but like the comment on the E&P industry, 36 billion [unintelligible] from 21 companies. The ability of this industry to be profitable has been challenged for years.
So we have to be learn how to be profitable in a lower environment. This is what I mean, we’re a mature industry now. We’re no longer a growth industry. All stocks have been moved out of the growth industries at Wellington and Vanguard and into value, mature. And unfortunately [unintelligible]. So I can’t do the same things I did when I was a growth stock at 18 and wild and crazy. Neither can the industry. So the ownership will reflect the difference. When people say, “Oh, can we go to 75 and then company’s going to lose their discipline.” At Fidelity, at Vanguard, at Wellington, and Texas State Teachers who owns the stock in Conoco says, “Oh no, you’re not.” Because he doesn’t get paid for owning growth stocks. He gets paid for owning value stocks. And he owns you. So you’re now a value stock.
And never in the history of the markets, has a sector been moved from growth to value and back to growth. So I hate to tell you all, we are no longer an 18, 19 year old, rabble-rousing, having-fun industry. We are all 39 to 52 with mortgages, and have to act like it. [laughter] It’s changed the strategic direction. With shale, we peaked our oil production. We’re good. They said that this year. Our oil production has peaked. Exxon says, “We’re not caring about production growth. We care about returns on our production.” And if people will scream, “Yes, but we’ll run out of oil.” That’s not Exxon’s problem, and they said so. BP [says] value over volume. We’ll cut our volumes as long as we make more money on what we produce.
So it changed the industry from the majors down. Return on capital and return of capital is the objective. If you don’t earn your cost of capital, as a company, your equity value declines. Now, that’s not an opinion, that’s a statement of mathematical fact. So, if you have a business and you own the business and it’s worth $100, and if you don’t earn your cost of capital for 10 years, that $100 will decline.
Your goal is to build wealth, not just work. I’ve got a seismic company in Houston. They’re setting their market cap of 2 billion to 80 by not earning their cost of capital in 16 out of 18 years. Eventually they just die and go out of business. This time, it’s going to be accelerated. Nobody’s going to get a 16 year grace period to have all that go away. And consolidation is a requirement, not a choice. This is the answer to most of the problems that we face. The equity markets are closed to [most of] the industry. A year and a half ago, there was 50 banks that would have loaned to E&Ps. Today there’s 25. The credit markets are actually open. There’s so much liquidity out in the market today, that we placed $20 billion in junk debt for the oil and gas industry so far this year.
So that’s a good thing. Everybody’s been able to refinance. Well, most companies going to be able to refinance. But the issue, of course, in this industry is having debt is the sin. Trying to lower the cost of it is nice. But you want to have as little debt in any cyclical business as possible. And it was interesting. You saw that rig count. After we started to recover after the bottom at ’16, in ’17 and ’18, it went up and everybody said, “Okay. We’ve seen the bottom. We can take on some debt now.” And then we dropped to lower levels then we saw in ’16. So in a cyclical industry, trying to time the market from a take on debt point of view works about as well as selling at the top. Nobody does it right.
[Slide 12: Is the O&G Industry Still Even Relevant?}
ESG issues are increasingly important. Who thinks ESG is a flash in the pan will be going immediately? [No hands raised.] Smart room. It’s here to stay. It’s not going anywhere. I think I have a whole slide on it. Okay. Are we still critical? The answer’s yes. I love the fact that all the renewable people, all the Progressives, go, “We want to get rid of the oil industry completely.” They have no concept of what oil is used for. They have no concept of what we do for a living. They have no concept of really anything. If you think OPEC is onerous, let’s go to all electrical vehicles where 86% of the world’s cobalt needed for electrical vehicles is in the Democratic Republic of Congo. Okay? OPEC will be a walk in the park after that. Colorado doesn’t like frac’ing. How about open-pit mining for copper? Which they’re going to have to reopen if we go to all renewables. Okay?
Scott Tinker in Austin, if none of you all have ever seen any of Scott Tinker’s videos, get out your phones. Send yourself an email that says, “Scott Tinker. Look it up.” He gives a very good explanation of the reality behind it. Now the people who say, “Well, all that renewable crap’s not going to work and I’m just not going to play,” in three years when we’re still pushing the renewables in, you’re going to be going, “Aha. I was right.” You may hopefully be right. But you’ll be saying, “I’m right from the poor house.” [laughter] That’s not the objective here. Okay? So for the next three years, the administration and the people behind the administration are going to push the renewable button as hard and fast as they can. And in the end, they may come to the realization of, “Holy crap. This didn’t work like we thought it would.” But that’s going to be several years down the road. And you don’t want to sit idly by and wait for that to happen. You want to jump in and take advantage of it.
[inaudible 00:03:40], his latest [tactic] is ostensibly to buy environmental service companies. Okay? [inaudible 00:03:47] when he originally wrote the S1 and said he was going to go buy E&P, nobody would give him money. But now that it’s environmental services company, he raised 220 million bucks. So it all depends on how you address the issue. Most of these facts have 14 different things they’re looking at. And that was the last thing you’ll say, and possible oil and gas assets. Because if you put it at the top, nobody will give you money. If you put it at the bottom, nobody notices. All they see is solar, renewable and throw the money at you. So a little advice in case anybody was going to start a SPAC.
So we are clearly critical. PetroChem is the highest value to add. Natural gas is the clear winner. We’re still not loved, but that’s kind of where ESG comes in.
[Slide 13: Light at the End of the Tunnel]
But there is light at the end of the tunnel. Assets will move to the most efficient operators. They may not be the most efficient operator when they buy Concho, but they sure will be after. And that’s the point. If you can’t be profitable at 60 to $65 oil, you will either be merged out or go out of business, whether you’re an E&P company or a service company. And you can say, “Well, as soon as oil goes to 75…” If you have to have a $75 oil price to make a profit, you’re in the wrong business. Okay? The number of companies will be reduced. We’re not going to have as many companies. I won’t say we won’t have as many people, because we fired so many people already, that we’re still short of people. Automation is intended to keep us even, not displace huge amounts of the workforce from here.
So when I say it’s going to be smaller, the number of people are going to be smaller than it’s been historically. I’m not saying it’s going to be smaller than it is now. The number of companies will be different, because we’re going to consolidate them all, a lot of them out, which is good. Companies that survive will be strong, profitable. Returns will be profitable. And from an investment point of view, we will be popular again. Okay? So there is definitely light at the tunnel for now.
I mentioned the “full cycle” of renewables. Most of you all probably already know that, because you got so many windmills around here. But windmill blades are made out of a toxic carbon fiber combination that can’t be recycled and we are currently disposing of them in Wyoming.
Now I haven’t heard many environmentalists bitch about that yet, because they’re just happy that there are windmills. But all that will come home to roost at some point. The industry will return to economic health. It will be a smaller industry, with fewer people and companies. Oil production, I don’t think will ever hit 13 million barrels again. There could be technological advances that help get us there, but just from a money and activity standpoint with the productivity we have today -this is what I mentioned when I first started – investors will no longer subsidize losses, and it took us losses to get to the 13 million, but we don’t have to get the 13 million to have a good business.
[Slide 14: The Dallas Federal Reserve Bank Speaks]
This is from the Dallas Federal Reserve. This was a survey taken, you can see at the bottom, March, of last month, oil prices at the time, I show you. And so it’s not that… Our industry is terrible at predicting oil prices, but this notes the optimism of the industry. And you can see the index for capex increased. And there was improvement in all indicators for service firms. I love to see anything surge when it comes to this. Operating margins improved, returning into positive territory. But the top one, you’re definitely seeing momentum to the upside in the business, and this isn’t from some yahoo analyst. This is from actually 155 people in the industry and collected by the Federal Reserve. When you’re sending [info] to the Federal Reserve, you actually have to kind of be serious. And so I think this is a very optimistic from the perspective of the views by executives in our industry.
[Slide 15: Major impact: Typical of its Kind]
This is just Chevron. The good part is while their spending this year we’ll be anemic, if you look at what their plan is between now and 2025, the trend is definitely up. It’s not the same expectation of spending that they had a year ago. That’s not good. But it’s going to be up from last year and this year over the next four years, according to them. And so Chevron says, “We’re returning after cutting too much. Exxon says, “The only focus we’re going to have onshore is going to be the Permian.” And so the smaller players right now have 40% of the rig count. It’s privates. The majors pulled back. The point of this is, they’re coming back. And their spending trend–again I’m getting back to the slope of recovery. I’m not saying it’s a sharp upward slope, but if it’s a positive slope of the next five years, we all win.
[Slide 16: Another Major]
This is Exxon’s spending. You see it’s down… But they still say they’re going to push it up. So while reducing it this year hurts, everybody expects to spend more over the next couple of years. And those are the big guys in this. And everybody knows that the smaller companies usually follow suit.
[Slide 18: (slide 17 was a repeat of an earlier slide) There is Little Choice But to Be Optimistic About the Future]
We have little choice but to be optimist. First of all, we’re all in the oil business. If we weren’t optimists, we wouldn’t be here. Technology continues to improve, and greater than almost anybody thought. You all realize the iPhone is 12 years old? Think about where and how old you were, what you were doing 12 years ago. We didn’t have the iPhone. My kids don’t know life without an iPhone attached to their hand. We didn’t have them until 12 years ago.
And so the idea that everything’s been invented. I’m the first to admit that we’ve taken drilling the wells from 28 to 21, 14 to seven to three. Can’t go to zero. Okay? And so in a lot of cases, in pressure pumping and drilling, we’ve gotten really, really efficient. We still have gains and technology’s still going to play a part. We’re all consumers. I mean, God, everybody I know in the oil business hunts and fishes. And so the idea that we’re not in favor of clean air and clean waters kill me. I read these things for people in Boston who thinks everybody in the oil business is trying as hard as they can to pollute the air.
We know better. That’s what counts. It’s a depleting resource. I mean, we aren’t drilling or looking for gold here, which stays in economy. It’s a depleting resource. And so we will continue to have to replace it. And even the whole hyperbolic curve. So even to hold production flat, we have to grow at a certain rate every year, then somewhere between 3 and 7%, which for a mature company is not a bad number. Carbon neutral is achievable. Carbon free is going to take a little bit longer. We’ve been transitioning this industry for years. I loved everybody talking about how we’re just doing it now. This has been going on for at least five years. We hear more about it. We didn’t have idiots talking about the new green deals six years ago. We do now. So in terms of the press, they think it’s new. But everybody in the industry realizes it’s not.
Just as the industry has evolved, so will the people in it. Going to be smaller. It already is. Profitable and critical are both good. You want to be necessary and paid well in your job. You don’t want to be the first guy they fire and not making enough that doesn’t matter. So you have to be critical to your organization, just like we have to be critical to the world, and we have to be paid well and we have to be profitable.
[Final slide. Slide 19. Quote by Niels Bohr: “Prediction is very difficult, especially if it’s about the future.”]
Oh, I love this one As an analyst, we are supposed to predict stuff and we did for years. And so I had this at the back of my slide deck for a long period of time. It’s easy to talk about it, but predictions actually being right is difficult, as everybody knows.
But my prediction is that oil prices are going to be between 55 and 65 for the next several years. That’s stability that we haven’t seen before. I understand. But there are forces that are lowering the amplitude. The frequency will still be there, but the amplitude goes away, just in time delivery, all the data that we have. We know where all the oil is in the world. Yet this is why oil inventories don’t mean what they did 10 years ago in predicting oil prices. Okay? We have a future. Our best industry’s going to be profitable. We’re going to be around for a long time. Midland is in the top two oil basins in the world, arguably [inaudible 00:12:40] in Saudi Arabia’s up there and the Permian Basin is the other. And that won’t change. We are 40 to 48% of all activity in United States. I’m enthused about the future.