This Cycle is Different, Partnerships Matter

Fair but meaningful price increases from services companies is the next step in building a more robust oil and gas industry.  When service companies earn a healthy margin they can focus on re-investment, innovation and growth.  Now is the time to build great relationships and push the envelop of efficient delivery together.  Value driven partnerships where everyone wins will not only increase oil operator margins but will deliver safer, more reliable production.

The last year has been extraordinarily strong for oil and gas operators. Oil price has increased to $80+ WTI in 2022 and has averaged well over $70 in the past 6 months. The windfall for oil companies has been impressive and demonstrated in share price, increased dividends, and share buy-backs.

The cash generation of oil companies has stabilized as most operators are no longer in extreme growth mode but have shifted to a “live within their means” mentality with a focus on shareholder return.

This strategy creates an interesting industry dynamic; rig activity has not swung to levels seen in previous upturns which has created an activity versus return equilibrium. This is a unique situation and I believe this is the first time in 10+ years where oil operators and service companies can live in perfect financial harmony. Because service companies can no longer rely on significant activity growth to offset reduced margins, they have one lever to pull to ensure they can provide quality service. This lever is to increase margins through price increases.

When I say price increases, I don’t mean price increases to offset the significant inflationary pressure related to input costs, but rather to earn a proper piece of margin that will allow for financial gain and re-investment.  When you compare the XES ETF (Services) and XOP ETF (Operators) you can see the stark contrast in 1Y returns between the two segments. This is more pronounced when oil increased beyond $70 WTI.

‍

If services companies increase prices fairly with operator support, we will create a deal zone where both sides win in the long term. Oil companies will get consistent and reliable service, and service companies will do what they do best which is continuing to innovate and provide great services. This ultimately helps operators deliver an even more robust investment case, as well times are reduced, reliability is higher, and systems are safer.

‍