Postcards from the Edge: What the Oil & Gas Industry Learned from the Downturn

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)-- With expectations that the crude oil market has finally achieved some stability, executives last week discussed what can be learned from the industry's recent downturn, where over a two-year period crude oil prices fell from a peak of over $100 per barrel to a low of about $30 per barrel before settling into the $40-$60 per barrel range. "Be prudent during the good times and be willing to sacrifice during the downturn," said Lynn Peterson, chairman, president and chief executive at Synergy Resources Corporation (NYSEMKT:SYRG) (Denver, Colorado). "Prices will increase, and we will see future downturns.

"The industry tends to have a short memory," Peterson said August 23 at the 28th annual Rocky Mountain Energy Summit (RMES), sponsored by the Colorado Oil & Gas Association (COGA) (Denver, Colorado). "The things we didn't do well when prices were high will come around again when we forget the discipline of low prices.

"Actually, these have been fun years for us," he continued. "It was extremely difficult to get employees and services when oil was $100 per barrel. Today, it's a very good market for getting people and service businesses because everyone's working hard to stay competitive."

The downturn helped Peterson and his team to build Synergy through acquisitions and acreage swaps. Today, the firm owns about 69,000 net acres in Colorado's Wattenberg Field. Production is expected to average about 11,100 barrels of oil equivalent per day (BOE/d) for all of 2016, up sharply from production levels of 4,290 BOE/d in 2014 and 8,725 BOE/d in 2015, the company told investors this month.

Peterson's co-panelist, Bart Brookman, president and chief executive of PDC Energy Incorporated (NASDAQ:PDCE) (Denver, Colorado), commented, "I don't think you need $50 per barrel to survive and thrive. What you need are the rocks and the people." The correction was "deeper and longer" than many in the industry had expected, he said, adding "we need to be exploring new acreage and deploying new technology because upgrading will only take you so far." However, he thought crude prices needed to stay over $50 per barrel to do that.

Asked by a moderator where PDC Energy "messed up" going into the downturn, Brookman said, "Never assume you can call the bottom. When crude fell from $90 a barrel to $60, we thought that was the bottom. We didn't recognize that things could get worse. If we did, we would have hedged some of our production at $65 per barrel. It really would have been nice to go into 2016 or 2017 with $65 hedges," he said ruefully.

"Some companies pursued growth at any cost," added Synergy's Peterson.

Looking forward, PDC's Brookman predicted banks and financiers would have more conservative expectations: Hedging at least some production will be required and balance sheets will have to have more equity and less debt.

Rising well productivity and falling costs are the critical drivers for producers in Colorado's Denver-Julesburg (D-J) Basin, as well as other unconventional formations across the country, Brookman commented. "Three rigs for us today is like seven or eight rigs in 2013. In the D-J Basin, recovery rates are in the low teens," he estimated, "but they could get to the mid- to high teens. Right now, we're balancing costs and ideas to try to figure out the next wedge of opportunity."

Another RMES speaker, Gary Sernovitz, managing director at Lime Rock Partners (Westport, Connecticut), a private equity firm focusing on energy investments, likened the Oil & Gas Industry's recent downturn to the dot-com meltdown of 2000-1. "Fifteen or 20 years from now, we'll look back and realize how much critically important work was done during a very turbulent time."

Using the pets.com sock puppet as an illustration, Sernovitz said some of today's more vibrant companies, including Facebook, Twitter and Uber, didn't exist when the dot-com bubble burst 15 years ago. "They were built on the technological advances that took place in 2000-1." He feels the same will be true of the Oil & Gas Industry circa 2030 or so.

"Any time there's too much money sloshing around, as was the case in 2000, bad ideas will get funded," he told a lunchtime audience of about 1,000 on August 24. "But good ideas also will get funded. You don't know which is which for a while."

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