“Independent producers will weather this low-price environment just as they have in the past, and Oklahoma will continue to be one of the best places in the world to invest in the oil and natural gas industry,” says Bannister.
Many working Oklahomans hold jobs in the oilfield, and more drilling rigs exploring for Oklahoma oil and natural gas put more Oklahomans to work.
However, all Oklahoma’s independent producers will continue to face challenges in a low-price environment.
“Oklahoma companies can be divided into the relatively small independent producers and the ‘super’ independents [like Chesapeake Energy or Devon Energy],” says Evans. “Each faces their own challenges.”
The super independent has a larger asset base (large acreages, production reserves, subsidiary operations, etc.) and likely has easier access to financial capital (via debt/equity issuance, private equity, etc.) and is likely to be more actively managed on the financial side (active hedging, trading, rolling over debt, etc.), says Evans.[pullquote]The interests of the small producers are increasingly at odds with the larger super independents on issues like spacing, pooling, etc.,” says Evans. “At least for now, the days of the wildcatting producer seem to have passed.”[/pullquote]
“However, the larger independents are likely to be traded publicly and have to leverage the areas just identified to manage market expectations and shareholder unrest,” says Evans. “That is, they have to manage through the current price environment while positioning themselves for the next price environment.”
In contrast, the small, independent producer is likely much less reliant on outside capital (although a fair amount of private equity money found its way to smaller producers in this last boom period) and has little in the way of marketable assets of significant size, explains Evans.
“Small producers tend to survive the storm using cash reserves, reducing their drilling budgets significantly, and looking for strategic ways to generate cash flow during a downturn,” says Evans. “A well-managed small producer can survive a price downturn as easily as a large independent; they just face a different set of stressors.”
However, these stressors can mean fewer jobs to go around, particularly in service companies. In a low-price environment, some independent producers have to lay off workers.
“There is some differentiation between oil and gas production and exploration (E&P) companies, versus the oil and gas service companies,” explains Steven C. Agee, dean of Oklahoma City University’s Meinders School of Business. “Service companies would include companies involved in drilling and completion/logging services.
“These service companies have been hit much harder, particularly in the area of employment, in this recent downturn than the E&P companies,” says Agee.
In addition, because the E&P companies are reducing the number of wells they drill and complete, in an effort to bring capital expenditures (CapEx) more in line with cash flow, the demand for drilling rigs and completion units (frack jobs, acidizing, electric logs, etc.) has also decreased, says Agee.
“As a result, E&P companies can extract a lower price for the services handled by the service companies,” says Agee. “This places an additional burden on the service companies, but actually works in favor of improving the margins for the E&P companies.”
In the future, the role of independent producers in the state will continue to change, much like the prices at the gas pump.
“The interests of the small producers are increasingly at odds with the larger super independents on issues like spacing, pooling, etc.,” says Evans. “At least for now, the days of the wildcatting producer seem to have passed.”
Wildcatter is a term, coined in the 1800s, for a person who is willing to risk drilling in an unproven area.
“The focus now is not on a wildcat search for the next big oil trap (a vertically drilled reservoir) but on the systematic extraction of oil from known formations (horizontally drilled and fractured wells through tight shale, for example),” says Evans.
“Oil and gas companies are increasingly large, technologically complex, extraction industries where they were once small, scientifically driven finding industries,” says Evans. “I suspect it will get increasingly difficult for small producers to find a niche in tomorrow’s oil and gas landscape. A certain size is probably necessary to truly participate in enough high-cost plays to maintain a manageable risk/return profile.”
But, for now, independent producers continue to contribute significantly to the economy, not only in Oklahoma, but across America.
“Independent producers develop 95 percent of domestic oil and gas wells, produce 54 percent of domestic oil and produce 85 percent of domestic natural gas,” says Neal Kirby, manager of public affairs and communications for the Independent Petroleum Association of America.
“Independents support over 2.1 million American jobs,” says Kirby. “Independent producers are investing 150 percent of their domestic cash flow back into domestic oil and natural gas development to enhance their already aggressive efforts to find and produce more energy.”