Price crash response quicker than 2014
Players have moved more swiftly and in different ways to react to the current oil price slump compared to previous downturns, panellists tell PE Live
The pace of the oil and gas producing sector in confronting the demand-driven slide in crude and other energy prices is markedly different compared to the response to the 2014 price drop, industry experts said during the first webcast in the PE Live series on 7 April.
The speed of response “feels faster”, says David Phillips, head of equity research, Developed Europe at bank HSBC. “Looking at the larger companies in particular, it feels that, in 2014/15, there was a lot of deliberation behind closed doors on which projects to prioritise and which to delay. Externally, we tended to hear about cutbacks a few months later.
“This time around, it seems to be, ‘We know to need to cut, it needs to be 20pc+, let us just get that message out there and we will sort out some of the finer details later,’” says Phillips.
Andy Brogan, global oil & gas leader at professional services firm EY, also notes a quicker response, but sees another difference compared to 2014, namely the state in which the price slump has found the supply chain.
“Last time, people looked at their feet for about six months before they finally accepted that we were in a different situation,” says Brogan. This time, “it is more like six hours”.
One of the initial reactions post-2014 was “to go to suppliers and ask for price cuts”. However, “suppliers’ profit margins never really recovered between the last downturn and this one,” cautions Brogan. “There just is not the slack in the supply chain that there was last time.”
“From a Houston perspective, what we felt very acutely in the 2014-16 period were significant layoffs,” says Julie Mayo, head of US oil & gas at law firm Norton Rose Fulbright. “It seems that, at least in these very early days, we are instead seeing efforts to reduce capex, cutbacks in things like compensation, and an attempt to avoid hitting that point at which we see mass layoffs in the tens of thousands that we saw in 2014 and 2015.”
Some of the lack of rush to shed jobs may be the result of leaner staffing compared to prior to the last price crash, says Mayo. But material personnel cuts may not be avoidable in the medium to longer-term.
“If [Texas Railroad] Commissioner Sitton’s projection is correct that it may take up to two years to see gasoline, jet fuel and diesel demand recover, and we do not see significant supply response over the same period, it would certainly be reasonable to expect to see more bankruptcies—and, correspondingly, more layoffs—during that period.”
The first PE Live webcast, “Crisis oil demand: the longer-term market implications”, in association with EY, took place on Tuesday 7 April. Those that missed it can still listen to on-demand here.