Thursday, December 01, 2016

Best Business Opportunity, Ever, Part XXXIX

We have an Opec agreement, for now, that is for the next six months. We’ll see if it lasts that long and if it has any effect on the global oversupply and overproduction of oil. Opec have agreed to “targeted” production cuts of 1.2 million boe / day and expect to see 600,000 boe / day in cuts to come from non-Opec producers. Six month agreements, after seven months of negotiating are one thing, implementation is another. Nonetheless, from the producers point of view this is a resounding win. They feel they’ve been fighting Opec for the past two years and have succeeded in surviving and asserting that they’ll not take the price maker role in the oil markets. What I do know now is that there will be no dealing with them whatsoever. Not that they were listening anyways. For the producers winning at all costs was the game plan and that has certainly been the case.

Producers will feel vindicated and have established themselves as the force to be reckoned with in the oil markets. That is until the next payroll is due. The reality on the ground may be that this is a hollow victory. What I saw in the third quarter financial statements would be nothing to be proud of. Will Opec agreements change the investors and bankers opinion on the viability of an oil and gas producer? The cash that is needed to keep the operation going is not being generated and these organizations have internal problems that have not been addressed or recognized for decades. Movement of the oil producers, and particularly the shale producers stock prices was dramatic yesterday. Reflecting that the business is more about the stock price as opposed to the underlying performance of the firm.

The issues of oversupply and overproduction are just symptoms of the larger cultural issues that are systemic throughout North America. Premised on the SEC’s determination that reserves are the value of an oil and gas producer and financial performance is irrelevant. You can’t run an industry for very long on that basis, and oil and gas has been operated on that for over forty years. The value that has been destroyed has been epic, and this has to be addressed before anything positive will be coming out of this industry. Producers stock prices aside.

The prolific nature of shale is already being promised to fill the volumes that Opec is “targeting.” Restoring the imbalance in the marketplace. And this will continue for the history of the industry until there is no oil or gas left. It’s a science experiment, not a business. There is no discipline, and no basis of business understanding supporting any discipline in terms of what produces and what’s shut-in. Commodities markets are not mythic creatures that exist on their own. They send information in the form of price. If your profitable at the prices offered, you produce.

Does anyone question that Opec did everything that could be done? What will it take to try again when the six months are up? Oil prices were up almost 10% as a result of the agreement. I have always asserted that Opec, in this drawn out agreement process, were trying to show North American producers that oil was subject to price maker characteristics. If I was right, then I would expect to have this agreement fall apart in the next 10 days. Then we will see the price fall 10% or more. These price changes show that the removal of marginal production from the marketplace would be the appropriate thing to do. It doesn’t make a lot of sense for Opec, the lowest cost producer, to be taking production off the market. Does it. Particularly when North American producers are all recording epic levels of losses. This issue isn’t over.

To me a decision needs to be made. Whether we travel along to hear that jarring gong or not is a pretty risky proposition. But that is certainly where we’re headed. The adults in the room need to stand up and take control of the situation. That would be my recommendation. I’m taking some time off. Screaming at the wall these past few months has become deafening. I also need some time to think about the next phase of what and where we’re going as an industry. Therefore we’ll see you back here on January 23, 2017. Have a happy holidays and if you need to contact me I’ll be around.

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