Crude Oil Plunge Requires Fiscal Re-Think

As one who started his professional career when oil was $10/ Bbl, recent events causes the hair to raise up on the back of the neck.

In light of the recent OPEC decision, everyone is now facing a much lower price of crude oil. So the question is what to do and how to be prepared for the various scenarios.

At Rand Group we try to make sure we can advise our clients not only on technology solutions, but also provide the depth of understanding of market dynamics so they can outperform their competitors.

As a Boy Scout leader we drill into our scouts the motto “Be Prepared.”  Many CFOs are now talking to their planning and analysis, and corporate development groups to get ready for what is to come. Others may be looking at loan covenants and re-running forecasts to figure out when they trip a default trigger in their loan agreements.

Come what may, the one thing we can count on is increased price volatility.

First let’s catch up on recent events since my last blog on oil and then discuss some practical tips for dealing with volatile change in price.

Crude Oil Plunge graph

A collection of thoughts on lower crude oil prices

The Price Itself

  • OPEC decided Nov. 27 to let the market set price and not cut production.
    • Oversupply in world crude is approximately 1 million BBL / day or more
    • The next OPEC meeting is not until June 2015
    • This is still a game of chicken between Saudi Arabia and Persian Gulf states vs. North American shale producers to see who blinks first on production
    • Some North American shale plays are unprofitable below $70/Bbl.
      • In Texas, most are still profitable down to the low $50 / bbl.
    • Crude oil “supply imbalances” are vastly overstated (i.e. oversold on the futures market) and we may see a slight rebound in price
    • North American producers are hedged to protect price into 2015
    • Existing production will continue, but new wells will only be drilled on economics of each producers’ forecast price/Bbl
    • Medium term is not so bad as OPEC meets in June 2015, Non-OPEC producers could make their own cuts, lower crude creates additional demand plus organic demand growth of 1 million Bbl / day each year


  • Master Limited Partnerships and others may cut distributions/dividends to unit/shareholders to conserve cash
  • Capital Expenditures will be cut and weaker companies will be in a cost-cutting mode which may include lay-offs of personnel and seeking to be acquired
  • The acquisition of Baker Hughes by Halliburton will result in great cost efficiencies, put good people onto the market as a result of redundancies, and the new entity will be a closer second in size and capability to Schlumberger
  • E&P and service companies that are exposed to the marginal portions of production zone are at increased risk of volume decline, reduced cash flow and debt distress
  • Petro states such as Venezuela, Iran, Nigeria and Russia must adjust 2015 budgets which were set on $95 to $135 oil
    • Use of foreign exchange reserves are being eaten up to defend currency and likely we could see distressed or even default on debt from these states if this condition extends for a long period of time
    • The dollar was at 33 rubles at the start of the 2014, and now is past 50 for the first time ever!
  • Low prices should stimulate demand which could begin to help as early as the second half of 2015

What To Do Now

  • Rerun your forecasts with sensitivity around a range of lower commodity prices and develop your action plans for each scenario
    • Does your current technology support rapid planning and what if scenarios in your ERP?
  • Review your current loan agreement covenants, borrowing base calculations and what effect different forecast scenarios produce.
    • Can your technology support automated reporting and do your have the appropriate integrated real time reporting around working capital including capital expenditures, (Remember cash is king)?
    • If you do see challenges tripping a loan covenant start the discussion now with financial institutions to modify covenants before a default happens.
  • Evaluate potential acquisition opportunities that may opportunistically present themselves or review how your company will respond to an unsolicited bid for your company.
    • Can your ERP application generate the data for potential suitors or can you scale your company with additional acquisitions efficiently?
  • Work backlog could drop or dramatically increase if a competitor disappears. You need to evaluate your cost structure to make as many components variable to maximize performance.
    • Does current technology allow you a detailed view to cost and margin by region/location/client/class/ product/warehouse/plant?

With all the volatility in the world today one can’t help but to remember the often quoted curse, “may you live in interesting times.” For some it will be a blessing and to others it certainly will be a curse.

At Rand Group, we try to ensure this adage gives you positive opportunities.

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