So as I mentioned, it is my favorite time to be writing the Newsletter – and that is earnings season. I love listening to what people who are not only much smarter than me, but have teams of people behind them who are much smarter than me have to say.
Now let me preface my take on earnings reports with this warning: Remember that a CEO’s job partially entails convincing you, potential purchaser of their stock, that you should buy their stock. A CEO is rarely going to come out and say “yeah fourth quarter is going to be crap, so you all should be selling our stock like crazy!” Not going to happen. They may give cautionary news, but they will always try to put a positive spin on things. So as happy as I get when I hear these experts tell us where the market is going, I also caution you that there is, justifiably, some amount of puffing going on.
Two things stood out to me in combing the transcripts. First, is what the CEO of Schlumberger (for whom I have tremendous respect) had to say about oil markets. Rather than paraphrase, I will give you the whole quote and see if you read what I read.
Turning now to the oil macro, the supply and demand of crude is now more or less in balance as seen by the flattening global petroleum inventories and the start of consistent growth towards the end of the quarter in particular in North America. In addition, oil demand was again revised upwards in September and is now forecasted to be around 1.2 million barrels per day for both 2016 and 2017.
At the same time global supply is plateauing as non-OPEC production continues to experience significant declines and even offsetting record production levels from OPEC in September. Based on current investment levels, we believe that 2017 non-OPEC production will at best be flat and any production outside from the U.S., Canada and Brazil will be offset by further declines in the rest of the global production base.
Given the projected demand growth, this means that the call on OPEC will increase from the current record production levels, suggesting that the production outside from Nigeria, Libya and Iran may be needed to keep the markets in balance.
All of this means that the period of oversupply and inventory build is over and that market segments should soon change, paving the way for an increase in oil prices and subsequently E&P investments. There is also a case to be made for a more rapid role on the global oil inventories and a more bullish outlook for the oil price in the event of a lower production upside from Libya, Nigeria and Iran OPEC and Russia implementation of production cuts for a steeper decline in non-OPEC production.
To me, this implies that he believes oil markets will rebalance regardless of any OPEC production freeze. Even more – he seems to be saying that we are now in bull territory. And that is huge.
The second thing I got from reading all of these transcripts, is that, as we have warned you about, the cycles are going to be shorter between boom and bust. And the big service companies are preparing for that. According to one CEO, their objective is to make as many costs as possible variable so that they can take advantage of the boom and then survive the bust. As a piece of business advice (which I am not sure you should listen to me on this), I suggest that you look for ways to implement that philosophy in your organization. We at Five Star are certainly looking to do that and our executive team has already had meetings about how to implement that philosophy over the coming years. That way, we can keep up our high standard of service in the good times, and get lean and mean so we can continue to deliver our customers good pricing in the downtimes. We are evaluating everything: from the way we transport your product to the way we set up our infrastructure (for example, buy a computer vs lease a computer) to insure we are able to adapt whatever the market conditions are.
Our goal is to grow and thrive with our customers. But the way we do that is through all of you growing and thriving. Which is why we deliver this Newsletter – so that our customers are well informed. Let’s hope we have truly hit bottom, but let us plan together for the next one so that we aren’t caught off guard again.
By: Ty Chapman
Five Star Metals, Inc.
Raising the Bar for Customer Service and Quality
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