By Paul Puri
Executive Vice President and Principal
Energy companies are keeping one eye on their balance sheets and the other on falling oil prices these days. Since June the average price has fallen from about $107 a barrel to a recent low of $82. Of course, a lower price means there’s less breathing room on the balance sheet to cover costs and make a profit.
Fortunately, most experts – except those associated with OPEC – are not overly concerned. A recent article in The Wall Street Journal, “U.S. Boom Can Stand Further Fall In Oil Prices,” quoted several U.S. forecasters who say domestic producers have become efficient enough in recent years; as a result, they can maintain their current level of output and still make a profit. One economist with ConocoPhillips said the price would have to drop as low as $50 a barrel to slow down U.S. oil production.
That’s good news for oilfield service companies too, who provide essential services to the production companies.
In fact, oil production in the southwestern U.S. has the lowest cost basis of anywhere in the hemisphere. Production in some parts of the Eagle Ford shale formation in South Texas would remain profitable down to $53 per barrel, while portions of the Permian Basin in West Texas have a cost basis of $57 a barrel. The Permian Basin has more active drilling rigs than anywhere else in the country.
So what’s the small to medium-sized business owner to think?
Most forecasters say a sound balance sheet and efficient operations will be sufficient for producers and service providers to weather the storm. The smart producers often lock in their selling price for a period of time. As a result, forecasters predict output should remain at or around its current level at least through 2015.
And then there are those forecasters who point out that lower oil prices will stimulate global economic growth, which will stimulate oil consumption and drive up demand for energy. Increasing demand is usually reflected in rising prices. Of course, the fly in the ointment could be OPEC, which might unilaterally deicide to lower its pricing structure. For the time being at least, the drilling goes on.