Remember way back in July when crude oil sold for more than $100 a barrel?
Those were good times for the oil and gas industry in Texas.
Crude oil prices have been in freefall in recent months, with West Texas Intermediate prices falling below $70 this month. Brent, the international benchmark for crude, isn’t far behind, trading around $70 on Dec. 3.
That’s been great news for consumers at the pump, as regular gasoline has fallen below $3 a gallon.
But if you’re drilling for shale, $70 oil certainly cuts into your bottom line.
Time to panic?
“Absolutely not,” said David Mahmood, chairman for Dallas-based Allegiance Capital Corp. “Those people who are in expensive formations, tight formations where the cost is higher, are going to feel it first.”
But management teams that are experienced and planned ahead for drops in commodity pricing will weather the storm, said Mahmood, whose investment bank specializes in mergers and acquisitions.
“If we get swayed by the moment, you’re like the proverbial ball in a pinball machine bouncing around,” Mahmood said. “That isn’t a good way to try to run your business.”
When he advises clients, he tells them that the only constant is change.
“You will come under price pressure when there’s too much of your product,” Mahmood said.
Anytime there’s a downturn, some companies lose but there are also winners. Stronger companies can buy up distressed companies at rock bottom prices.
It’s similar to what happened with natural gas prices in late 2008. At that time, new shale production caused a glut of natural gas in the market, sending prices tumbling.
But there were winners, too.
All along the Texas coast, new petrochemical plants were built to harness this dirt-cheap natural gas, creating a new manufacturing renaissance. Trucking companies, airports and taxi companies started converting their fleets to run on natural gas.
“The very thing that was a problem has now become an opportunity,” Mahmood said. “Once you put those billion infrastructures in place, they aren’t moving. They’re going to stay in Texas and Louisiana.”
And what happens if natural gas prices do go back up?
“All of the sudden the producers will have a lot more users of natural gas,” Mahmood said. “Why did that market get created? Because the gas was cheap.”