[ROCKMAN]

More than a year ago I chatted with some folks here about their expectation that Chesapeake could one day slide into bankruptcy. Their business plan heavily dependent on chasing the shales, combined with staggering debt, seemed to be the setting stage. I explained that regardless how bad the future might be for CHK such companies rarely disappear into a bankruptcy fog. The dynamic has been well established for decades. Just days ago I reminded some folks there were two members of Big Oil at one time: Exxon and Mobil Oil. Today there is one company... ExxonMobil. As it has been pointed out public oils need to at least keep replacing, if no increasing, their reserve base. For a company as large as Exxon was it was virtually impossible to replace their production with the drill bit. For instance the year ExxonMobil acquired XTO that acquisition alone represented more than 80% of XOM's reserve growth that year.

The public service companies have a similar demand from Wall Street: keep increasing revenue. Rather easy to do during boom periods such as the one we're in: their share of the pie doesn't need to grow as long as
size of the pie grows.

In another thread a few days ago discussing the potential fallout from dropping oil prices I mentioned that discussions over this potential began inside the about 6 months ago. Obvious the Big Oil and Big Service Company PR machines weren't going to say anything. But the folks who run company operations, like the Rockman, discuss such expectations daily with the vendors. The PR departments might avoid the subject but we ops folks need the trust of the service companies and visa versa. So even though the Rockman doesn't chase the shales he competes with those companies for some of the equipment. For months those service hands have been telling him the same stories: other ops managers warning of a weakening demand for their services. Not right away but 2015 might not be another record breaking year. And THE major cause of this potential crushing of the service companies? The boom times. Boom time that pushed these companies to invest tens of $billions in infrastructure to take advantage of booming demand. But as always: You pays your money MD you tales your chances.

I certainly don't have an insider position on the following press release. But I can assure you this conversation didn't begin a few weeks ago when oil prices began to slide. Probably started quite a few months ago. So if a public oil buys another weakened pubco's assets to expand their reserve base how does a service company increase (or a least maintain) the revenue stream when the pie begins to shrink? Easy: grab a bigger piece of the pie. In addition to getting the other company's cash flow and clients they may also be eliminating a competitor. Not only valuable in the moment but more so when activity eventually increases.

"Halliburton Co. (HAL) is in talks to buy Baker Hughes Inc. (BHI) in a deal that would combine two of the largest and oldest names in the energy business as plunging oil prices send the industry into a downturn. By eliminating a competitor, Halliburton, already the world’s second-biggest provider of oilfield services, would gain market clout that would help insulate it from a sustained market decline. A combination of Halliburton with No. 3 Baker Hughes would be a little more than half the size of larger rival Schlumberger Ltd. (SLB) “The two gorillas in the room are getting together,” said Ed Hirs, who lectures on energy economics at the University of Houston. “Halliburton and Baker Hughes would have been competing more strenuously to maintain market share in the downturn, but this will make that easier.” Baker Hughes rose 15 percent yesterday to $58.75 a share in New York, giving the company a market value of more than $25 billion. Halliburton rose 1.1 percent to $53.79, giving it a market value of about $46 billion. The deal will probably be closely scrutinized by federal antitrust regulators, especially where the two companies’ businesses overlap most in North America. With Baker Hughes, Halliburton fills a gap in its portfolio of oilfield services: technology to boost production in aging wells. Halliburton also gets Baker Hughes’ prized oil tools business."

Depending on how low and for how long oil prices slide this could be the beginning of a major bloodletting. For producing companies as well as the service companies. This might bring smiles to some folks that dislike the oil patch but remember where such a path eventually leads: decreased value/revenue for all the oil patch companies... companies in which the majority of stock is owned by tens of millions of middle class workers/retirees, unemployment of a large number blue collar workers who pay a lot of taxes, decreased leasing/production that will reduce revenue to mineral owners including the municipal/state/federal govts, eventual rapid decline in domestic production as drilling budgets are cut which in time will increase dependency on oil imports from an increasingly volatile world market.

But don't worry about the Rockman and his current coworkers. Anticipating this run of events we began several months go aligning ourselves with a new company structuring itself to take advantage of weakened companies and acquiring their oil/NG assets at a discount. And just by coincidence we closed this new deal this morning as the Baker Hughes story hit the wires. We'll also take advantage of the service companies that will become increasingly desperate for work... big discounts ahead. There have been other shops preparing for this possibilities. We'll also use close relationships with the oil patch bankers to help harvest the ripest fruit: the bankers have been anticipating the need to react to the developing dynamics long before everyone else. The Rockman has been thru more than one shake out and watching the personal damage done to the boots on the ground has always been unpleasant. But it's part of the inevitable cycle.

On a number of occasions I've made the point that given the right circumstances the oil patch eats its own. Some might have thought I was kidding. I wasn't. Time will tell if this is just a bump in the road or a massacre as it was back in the 80's. As always: it ain't personal... just business.

[shallow sand]

Hit the nail on the head. I hate this, but figured it was happening. Hope its a short one. Oil always overshoots both on the way up and on the way down.

ROCKMAN, do you think that many of the buyers of the distressed will be foreign? There have been some conspiracy theories floating around that this is an effort by State owned oil cos to do an end around and pick up some US reserves and technology on the cheap.

I hear lots of conspiracy theories out here though. It can get pretty far fetched sometimes.

[Paulo1]

In any industry downturn companies might merge and eventual shakeout effeciencies occur, nevertheless, as the dust settles fewer people are employed and those that are employed end up with a new way of working doing more and receiving less pay for doing so. Furthermore, people find that resources and stability has disappeared.

About 16 months ago I took an oil sands superintendent fishing. I launched my (small and effiecient) boat at the log sort I use and as I was heading out I noticed he was madly taking pictures of the dozer boats and sidewinders working; the big loaders lifting up truckloads of logs in one go, (big off-hwy rigs with 16' bunks), the guys running over the booms in their caulk boots hooking up for a tow, everything. I was amused and fascinated with his interest and he peppered me with questions. When I told him that just 30 years ago workers made the same kind of money his guys now made he couldn't believe it. But it was true. I would pick guys up on our sched at one camp and before we got to town they would have another job lined up if they really wanted to work. I have seen fallers walk off the job for no orange juice at breakfast and once a crew threatened to quit because there were 'store bought' cookies set out for lunches. These are extreme examples but by and large the money was awesome, work plentiful, and the profits were spread around. There were profits, that was the main thing. Everyone shared the wealth including the flying service I worked for. I was a unionized teamster flying bush planes into logging camps.

We thought it would never end.

Entire towns died.

The sawmill I once worked for finally shut down....sputtering from 600 guys, to 300, to a highly mechanized 150, and finally the logs got shipped out whole to the US where mills were being built to avoid US tariff restrictions and where workers made less money. Now, the wood goes straight to China and those US mills are silent as well.

These were all a result of mergers and downturns, tariffs, etc in that neverending race for the bottom where the working man finally raises up his own bottom for the final shellacing. I believe the Brits call it "redundencies".

A couple of downturns later, and a few shakeouts and mergers, slowdowns and layoffs, union busting and contract fiddling, there is almost no competition between the logging companies. Established multi-nationals have merged, mills shut, and workers starved out into being contract workers for many operations. Many workers have day rates now, no overtime, or are paid by piecework. Just last year a sawmill worker who was shafted by his company (along with hundreds of others) came in and shot up the office with a hunting rifle, killing a few and getting a bullet into the head of the manager who did the dirty work for the TSX traded multi-national of which my pension fund apparently owns a hefty chunk. This happened in Nanaimo, B.C.

It will be the same for the oil industry and I am sure their version is currently underway. So Rockman, Haliburton might merge with ________, as Exxon did with Mobil, but the story in this finite world is decline decline and do more with less.

People get fucked.

In logging, in the good old days, families were involved. The industry was multi-generational and an owner worth millions would be seen in the mill or on the side hill with his hard hat and dirty red straps. He knew each employee or at least seemed to. He knew every pilot as we were key in keeping his camp supplied and running. Now, the companies are publicly traded and owned by pension funds, (like mine). Workers are numbers meant to be laid off at the slightest slump. The managers are dicks. Everyone is always looking for a new job to go to, like it once used to be.

Paulo

[JohnnyOnTheFarm]

We'll also take advantage of the service companies that will become increasingly desperate for work... big discounts ahead.

You can just SEE those lower costs, can't you Rockman? Good for you, any lower costs for you lead to the ability of companies to develop what would normally be more risky/less productive geology because if you can do it cheaper, and when you calculate risk adjusted value, you can play Jerry Mcguire... SHOW ME DA MONEY!!!

And the benefits flowing into the economy from the lower prices for fuels are just a wonderful knockon effect, so keep up the good work!! Hammer on those service companies until they work for free or starve!! The American consumer thanks you!

On a number of occasions I've made the point that given the right circumstances the oil patch eats its own. Some might have thought I was kidding. I wasn't. Time will tell if this is just a bump in the road or a massacre as it was back in the 80's. As always: it ain't personal... just business.

Dear Lord, Give Us Just One More Boom and We Promise Not To Screw It Up.

Looks like the American consumer is about enjoy the flipside to the petroleum geologists prayer...quick question on severity Rock...think we can get back to <$2/gal again? To much to ask for the good old days of $0.50/gal I suppose, but <$2/gal? Maybe? At least in Texas and Oklahoma maybe?

My fuel bill thanks you Rock...keep up the good work!

[wake]

If you could buy out at a substantial premium a particular couple of highly leveraged companies (one or both of which effed up by getting seduced by the ultra deep), that are trying to make money reworking wells in the shallow gulf and failing even back at $100 oil, it would be much appreciated.

Probably you are a better operator

But don't worry about the Rockman and his current coworkers. Anticipating this run of events we began several months go aligning ourselves with a new company structuring itself to take advantage of weakened companies and acquiring their oil/NG assets at a discount. And just by coincidence we closed this new deal this morning as the Baker Hughes story hit the wires. We'll also take advantage of the service companies that will become increasingly desperate for work... big discounts ahead.

[sparky]

.
I've seen this in the oversea contractor business , boom times ...the scheduler phone YOU , all smiles and friendliness
bust times..... waiting by the silent phone ,
if you make a call , some secretary leave you hanging for half an hour and say sorry but ....

Could be wrong but I don't see this as a quick dip , there is too many ordinary people having good money
time to put the squeeze on , hard , clean up the mind of the blue collars from some delusions
productivity gain can be made by making more smarter but the surest way is ALWAYS , ALWAYS by chopping heads

Many are called but damn few retire

[ROCKMAN]

"ROCKMAN, do you think that many of the buyers of the distressed will be foreign?" Time will tell Shallow. Historically when the bust hits the strong typically rape the foreign owners worse than our locals. Most of those folks are passive investors...don't run the day to day physical activities. And watch how those acquisitions go: a pubco will typically use a large amount of their own stock in their offering to take out another company plus take over their debt. So often just a small portion of the acquisition is cash. When the biz begins to slide the foreigners usually want to bail out of the oil patch completely and want cash. And it’s those requiring cash that usually have to take the lowest price. The shareholders of a weakened pubco might lose money on paper but they can at least retain expectations of recovering some of it as the value of the acquiring company eventually improves.

You and I have been thru this before. Always mixed feelings. Sort of like the “point man” strategy: works good for the rest of the unit…not so much for the guy on point. Except in the oil patch instead of rotating by the numbers you look for a hole to hide in. A hole that’s designed to weather (and possibly take advantage of) the bad times. As opportunities develop we also have a front row seat to the pain. As mentioned above it’s the same dynamic when any industry hits a bad slump be it real estate, web companies, etc. You sit back and watch families fall apart, life styles greatly reduced, tax basis damaged, etc. Back in the last big bust I knew of two geologists that committed suicide. But I got lucky then finding one of those niches and had one of the more financially successful periods of my career. As I mentioned in another thread that was when I could drill and complete shallow wells for $60,000 that would have cost me $600,000 a year ago. I also used a technology common offshore that was nearly unheard of in the onshore arena I shifted to. For the last two years I’ve been working on the same approach with a different technology anticipating what might happen in the future. And now with Baker being gobbled up by Big Red that tech should get cheaper in the short term. Long term? I won’t be around then so it doesn’t matter to me. LOL.

I know it will sound illogical but due to falling costs one can make a better profit during low oil/NG price periods then during the price spikes. But the hitch is that it works best for privately owned companies. Public companies need the hype and reserve base increases to keep the party going more than profitability. I’ve seen this dynamic played out over the years which is why 5 years ago when I had to give up well site consulting due to my MS I found a privco to work for even though the pubcos were chasing everyone. And now I am taking the next step by sliding into a gig with a “garbage operator” like you. LOL. Some folks might think I just insulted you but you know better. I’ve always been better at sifting thru a pile of “garbage” and finding a nugget then wildcatting. I’m sure your path has been similar. The public won’t hear about our operations compared to the demise of so many pubcos we may see in the future. Which is fine by us since all we care about is keeping the income flowing and not notoriety.

[dinopello]

I, for one have been buying up offshore drillers DO and ESV. They are down 40% from last year and the dividends are still flowing nicely. I'm not nervous about it but was it a good idea ?

[GHung]

I saw the same thing in the GIS software - utilities mapping industry. The last company I worked for occupied 6 buildings when I started there as an IT analyst. Several years later the six hundred+ developers and map digitizers were largely gone, the survey dept. was scaled down to a fraction of it's former size, and I was a supervisor for quality control, trying to make sense of maps created in India from US sourced data, in the single building that hadn't been leased out. I left just before the company was 'merged' with a partially foreign-owned competitor, more disgusted with the quality of the product than anything. I refused to put my stamp on it.

My neighbor's son is a hog farmer in eastern NC, contracted to the giant Smithfield Foods. He works for the Chinese now, and has been attempting to build a co-op of hog farmers to repatriate their marginal profits. Turns out there are some little nasties burried in their contracts; non-compete clauses and such, and they'll end up in court. Who do you think can better afford the ongoing huge legal costs; these farmers or the company? They'll still be producing the same product, but won't have any say in where it goes or who profits.

The jobs at my last employer won't be back. Their current hires are almost all contract workers and not only are the majority of those positions half a world away, but these skills are essentially lost in the US over time. No point in training Americans for jobs in India.

At least they can't send the oil somewhere else until after it's produced.

[shallow sand]

I am honored, and not offended by the garbage comment. Bought a lot of production sub $10,000 per bbl. Had a nice talk one time with a guy from GE Capital at a trade show. When I told him where and what we owned, he was nice but said that was a "non-starter". Couldn't have complimented us more. Have never borrowed to drill. Funny thing, WTI was stuck between $99-104 early this year. We were talking how strange, yet great that was. It then spiked to $107-108. For some reason that made us feel uneasy and we started hoarding cash. We never admitted openly this would happen, but we did do what we did for some reason. We are still good, but another $20 down will make things tight.

I think another thing that bothered us this year was that a couple "drilling programs" started in our area. Last time that had happened was around 1985. Here's hoping this will not be as deep as 1986/1998. Oil field work wages have finally gotten to the point where people can make a decent living and have some stability, paying way more than the factories and Wal-Mart. I hate to see that go almost as much as what this downturn could cost us.