Falling Oil Prices: What does it mean for the O&G sector?

The S&P downgrade of the US Treasury debt rating to AA+ from AAA did not just dampen the stock market and corporate valuations. It also sent oil prices barreling down to $79.30/bbl – this is a 17% drop in just one month. Investors are fearing for an economic slowdown, mainly in the oil thirsty markets like the US and China. In addition, there is concern that the price could fall even further with the forecasted downward trend in demand and rising supply. However, it is welcome news for the consumers and economic growth in which one of the most essential commodity prices is down. But, what does it really mean to the oil companies? According to Baker Hughes, there are 1,031 rigs drilling for oil in the US, a level unmatched since the 80’s. A lot of these companies bet their E&P investments on the oil price hovering at higher prices, closer to $100/bbl. Are the oil companies going to get snagged by their own investments? What should be the break-even point for their investments to continue? Some analysts are stating that the oil needs to be around $90/bbl to generate an ROI of 10%, which is a distressful situation at the current price levels. The major and super-majors can weather this price condition for their current projects and are able to fund the short-fall. However, smaller E&P entities spend a significant portion of their earnings on these projects. What will they need to cut to stay afloat?

The new safety regulation, SEMS, coming online effective November 15 is one area that they cannot cut back on. This is a program that is mandated and enforced by BOEMRE. This may be the right opportunity for these companies to look at the overall value automated software systems can provide on the road to SEMS and other regulatory compliance. These software solutions also provide best practices based systems that can help these companies optimize processes, increase operational efficiency, improve quality and gain more value out of their investments.

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WSJ article: http://online.wsj.com/article/SB10001424053111904480904576498681728974142.html