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Ty’s Take 2-10-17

Well, the good news seems to keep coming in. And we remain cautiously optimistic, but more optimistic than we have been. For Five Star, January was still well below our average, but a significant improvement year of year and month over month. February seems to be trending even better. So while we are not where we need to be, we are certainly on an uptrend. And we hope that continues.

This week there is a lot to talk about. First and foremost, is the earnings that we reported. More than ever, I am going to encourage all of our readers, particularly those of you responsible in any capacity for planning for your business, to at least skim the earnings report we provided this week (FMC, NOV and Oceaneering to follow in our next edition). The CEOs of these big companies are much smarter than me, and I think their guidance is very telling. From reading all of the transcripts from the earnings calls, I discerned a few key patterns where all of the CEOs seem to be in agreement.

First, all of the CEOs that gave their market impressions seemed to have the same take. North America is recovering. Some were more optimistic than others about the extent of the recovery, the timing, and/or the length of time of the upturn will last. But all seemed to agree that we are, in fact, in a recovery in North America.

And as a corollary, all seem to believe that North America will drive the recovery: both in terms of production actually increasing and creating the increase in demand for oilfield service companies products and services so as to allow them (and therefore all of us) to return to profitability.

Second, all of the CEOs also noted that outside of North America, the rest of the world seems to remain in a downturn. Many reasons were given for that. But at the end of the day, all of the CEOs seemed to agree that the rest of the world will begin to recover – in all likelihood in the second half of the year.

Third, all of the CEOs indicated that service pricing for their products and services are going up. All of them noted that there are still some companies willing to operate at a very low price just to generate cash flow and those people are driving the market. But Schlumberger, Baker-Hughes and Halliburton have all indicated that they were demanding and receiving pricing concessions given up during the downturn back. The CEO of Baker-Hughes said it best when he said, “we're not shy about having the conversation with our customers that equipment needs to go where it's loved the most.” In other words, we’re not working for free and we will not do business with you anymore. Mr. Laser, CEO of Halliburtion said the same thing – in effect, that they would rather just not do the job than not make enough money.

And as a corollary, these CEOs seem to understand that their vendors will want to regain some of the concessions given during the market downturn. As the CEO of Halliburton said with respect to their service price increases in light of the “animal spirit” their North American customers are showing towards increasing their activity, “Keep in mind that our suppliers also expect to benefit from our customers’ animal spirits.

So these CEOs expect their costs to increase. I believe this bodes will as they understand we have all made concessions to help each other survive this downturn, and they understand their supply chain needs to florish as well.

Interestingly, this is the first time the CEOs seem to be predicting some recovery in offshore. While all of them indicated offshore was not in recovery yet, and would not likely be until at least the last half of 2017 or sometime in 2018, all of them seem to indicate some hope that Deepwater will recover due to structural cost decreases.

And at the end of the day, all of the CEOs acknowledged that this is a highly cyclical business. Some said we are at the start of the recovery which could be sustained over a several year period, but most shyed away from any prediction of how long this cycle will last.

As always, I remain enamored with Paal Kilsgaard, CEO of Schlumberger, as I always find his analysis to be fact driven, intellectually honest, and one of the best data analysis around. After explaining all of the production that has come offline over the last few years, Mr. Kilsgaard stated as follows:

At current oil price levels this will result in the third successive year of lower Capex spend, which will further weaken the state of the international production base…This is equivalent to borrowing barrels from the future. As a result, the activity and Capex required going forward to replenish reserves in order to uphold production for the medium to long term will be much higher than the current decline rates may suggest. This concerning trend cannot be reversed or mitigated by North America unconventional resources alone, which currently represents only around 5% of global crude production…The future supply challenges of the industry can only be addressed by a broad increase in global investment. Therefore as international E&P cash flow improves in the coming quarters we expect to see E&P investments accelerate in all main producing regions leading into 2018.

He then went on to say something even more interesting to me. “Now, I think the key here is that we look at 2017 as a starting point of a new multiyear cycle, where the main challenge is actually going to be reverse the effect of several years of Global E&P underinvestment and then try to mitigate the pending supply shortage that we see unfolding. But the only way to achieve this is through broad-based increase in global E&P investments as North America and non-conventional production is not going to be able to address this pending supply issues by itself.

Sorry for the long quote, but wow, are you kidding me? So he sees the problem as actually having more than corrected, he is arguing that despite all the data to the contrary, and there is a lot as some argue that right now, the world is demanding 95.8 million bpd and there is still 96.4 million bpd of supply even with the OPEC cuts, that we don’t have it right. He seems to be saying that while it appears the world is still awash in oil, it will not be for long. And if anything, because of the lack of investment, we are going to be playing catch-up, which will create a “multi-year” upturn.

While I hope he is right, there are many that disagree with him. In the interim, we will continue to plan our business for conservative growth but also prepare for a crash that might happen sooner than we all expect. The age-old adage of hope for the best but plan for the worst.

And on a quick side note, I want to take a moment and issue a few thank yous. First, thanks to all of you that filled out our survey. ISO requires us to do it annually. We really appreciate your honest response and feedback. We actually do look to try and find areas of improvement.

And I also want to thank those of you who have come out to visit us for our lunch and learn series. We sure enjoyed having you out. For those of you that haven’t attended, we hope you will consider coming over. Just let your salesperson know and they will get it scheduled.

Until the next edition, I wish you all the best and as always, feel free to email me your thoughts or comments. It is always a pleasure to hear from you all.

 

By: Ty Chapman
Five Star Metals, Inc.
Raising the Bar for Customer Service and Quality
Twitter: @FSM_TY

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