Recent years have been some of the most challenging periods for the conventional energy sector in history. Following the collapse in activity due to the downturn in late 2014, oil and natural gas companies began to shift resources towards US unconventional plays which recovered ahead of the rest of the market. Even prior to the Covid-19 related downturn, many companies across the sector struggled to produce positive cash flow due to a volatile pricing environment, underperforming wells and high decline rates. Most OFS companies struggled to achieve profitability similar to pre-downturn levels due to continued overcapacity, intense competition leading to frustratingly low pricing, and operators capturing most efficiency gains. Most companies also saw reduced capital availability due to their inability to create free cash flow as well as investors and their limited partners increasing focus on decarbonization.
The rapid drop in oil prices due to the impact of Covid-19 related lockdowns saw the industry reduce already declining investment levels, leading to record production drops. As demand has recovered, the industry’s inability to ramp up production combined with geopolitical concerns has led to a recovery in oil and natural gas prices, with the industry now in policy makers crosshairs due to high levels of inflation. Energy distributors across downstream oil, natural gas and propane have seen customers’ bills grow due to rising commodity prices. Despite these concerns, policy makers continue to implement increased regulations to reduce carbon emissions, and investor interest in the industry remains depressed. Producers, service companies, midstream companies, and refiners need to find a balance that allows them to supply the conventional energy required for continuing prosperity while also adapting to a changing demand and regulatory environment.
Despite these challenging conditions, there are some companies that have found ways to be successful due to a focus on profitability and innovation. To drive success, companies need to learn how to operate in this new environment, right size their businesses to the realities of the current market, focus on cash flows, understand how they can outperform their competitors, and prepare for the energy transition.
Companies that don’t prepare for the changing environment and differentiate themselves through technology, robust competitive advantages, or execution will struggle.