Oil and gas pricing is very topical these days. The fundamental issue is a supply and demand imbalance for both oil and gas. Demand has come roaring back with COVID shutdowns mostly behind us. Supply is lagging for several reasons. Worldwide spending for hydrocarbon exploration over the last two years has been about 50% of the prior 5-year average. Companies are exercising much more capital discipline as called for by the markets. Governments are discouraging development for hydrocarbon spending by making it harder to get leases, permits, and financing. OPEC spare production is near historic lows and the war in Ukraine has effectively curtailed Russian production. Worldwide exploration for true wildcatting is very low. The only places with the ability to rapidly ramp up production are the US and Canada, and both governments are openly hostile to domestic producers. Despite that and because prices are so robust, the North American rig count is rising slowly. That should result in modest adds to US production over the next year of about one million barrels per day. That will only serve to offset declines in much of the rest of the world. With the exception of a deep recession, we anticipate robust prices for the several years in both oil and gas. This pricing environment will result in a unique opportunity for companies with strong balance sheets and quality inventories.
While the head winds of the past few years appear to be behind for the E&P companies, there remain several issues that $100 oil is struggling to cure. On the service company side, the rig count remains below pre-pandemic levels and there continues to be a surplus of equipment; however, a labor shortage has effectively placed a limit on the amount of work that service companies are able to safely perform. Labor issues have raised cost of services for OFS companies, but have also increased the revenue that OFS companies with experienced crews can charge for most operations.
At Carl Marks Advisors, we understand the challenges facing companies across the E&P, midstream, and oilfield services sectors, as well as what these issues mean for their stakeholders. Our experts, led by a team on the ground in Houston, knows how to pinpoint critical value drivers, evaluate the options, and help make decisions that borrowers, lenders, investors, and other stakeholders face regarding capital expenditure plans and liquidity requirements.