Feeling the Bern

The Coronavirus, OPEC+, and Bernie Sanders walk into a bar…

Dear entrepreneurs, buckle up! You are in for the fight of your life.

The drunken apocalypse is finally here. First, we have the Black Plague that has fallen upon us (no George, this is sarcasm). Is the coronavirus a big distraction and really the equivalent to a strain of the flu? Or should we all go out and buy masks (at a markup, of course) and stay home? University classes, canceled. NBA season, suspended. Employees working from home. CERA Week and SXSW canceled. The soirees that we are all looking forward to attending, canceled. So much for hurricane parties. Texas, where is your grit? This pandemic is getting serious.

The Great Mask Debate

“All this swordplay, and riding around on horses — gives me a frightful headache.”
– Alejandro, The Mask of Zorro.

We have been having this debate at the office about the efficacy of wearing a mask to protect us from someone that had too many Coronas. What say you? And what are we teaching our college students about perseverance?

I decided to take the contrarian view. If the CDC — the U.S. Centers for Disease Control and Prevention — says it is safe to not wear a mask, I am in. Yes, I went looking for data to support my already held belief since I am not sure I trust the CDC. It will be interesting to see if their budget gets cut as our current President is proposing.

I digress.

I decided to put my belief of not wearing a mask to the test. I left this past week across the pond (mask-free, of course) to soak up this apocalypse in continental Europe. It seems that I am not the only surfer that had the same idea. Great minds! Turns out, the airport was completely empty.

Hmmm… this leads me to why this even matters.

I spent my Sunday riding around Holland seeking inspiration from the great Dutch artist, Rembrandt Harmenszoon van Rijn, who painted my favorite, Christus in de storm op het meer van Galilea, or The Storm on the Sea of Galilee in 1633. Maybe I am looking for a miracle to ride out this storm upon us. …And for someone to find the painting since it was stolen in 1990 from a museum in Boston (the plot thickens!).

Whether hype or not, the virus named after a premier Mexican beer is having a dramatic impact on demand for oil & gas products. That includes diesel, jet fuel, and gasoline.

No More Peace in the Middle East

Coronavirus is only the beginning. Almost simultaneously, the OPEC+ — you can read more about OPEC+ here. But, in a nutshell, OPEC is the 14-member cartel led by Saudi Arabia with the goal to control/stabilize oil prices. OPEC+, formed in 2017, includes ten other non-OPEC members led by Russia — has decided this past week to take their ball and go home. While the demand for fossil fuel products is plummeting globally and creating a suppression on oil prices, the Saudis have decided to increase their supply and even give a discount as a direct negotiation tactic against Russia. And it impacts everyone else, for that matter. Calling this just a “price war” is being nice.

For all of you conspiracy theorists, do you think Russia and/or Saudi Arabia have their sights pointed at the U.S. to wipe out the largest oil-producing country — or at least severely cripple it? Let’s rock out on LinkedIn because this is getting good.

For all of you fans of a fossil-fuel-free world, this is complicated. Lower oil prices = tougher markets for renewable project IRRs. For those entrepreneurs that depend upon incomes and building fortunes off of oil & gas, this is a bad sign.

Let me give you an example: In May of 2019, Occidental bought Anadarko for $57B. Today, Occidental is worth $25B (at the time of writing this article). And it is only getting worse. (new edition) As of a few hours before this post, “Occidental Petroleum Inc.’s first dividend cut in 30 years may have set a precedent if the S&P 500 Energy Index is any guide. Two weeks ago, the index’s dividend yield surpassed a record of 4.9% that had stood since 1992, according to data compiled by Bloomberg. The yield rose above 7% Monday as the industry gauge suffered the biggest loss in its 30-year history. Tumbling oil prices helped drive up the yield and prompted Occidental to slash its payout by 86% in an effort to conserve cash” (thank you, David Wilson).

The Russians are not the only ones that are going to take it in the chin. Clearly, this is already having a dramatic impact on the U.S. based oil & gas firms, especially the already unstable unconventional players.

Bankruptcies in 2020 Are Going to Accelerate

If demand continues to be suppressed and there continues to be an oversupply, oil prices will remain low, and there will be many more bankruptcies in the U.S. At the time of writing this note, the WTI oil price is hovering around $33.20, and Brent crude is hovering around $36.76. And the demand for oil is dropping due to the outbreak.

If you thought this couldn’t get worse, read on: “The oil market appears to be resistant to sustained increases in spite of two major geopolitical events in the Middle East — the September 2019 attack on Saudi Aramco’s oil facilities and the heightened tensions following the January 7 drone attack on Iranian Major General Soleimani.” And now you have the move by the Saudis to increase production at a discount.

Over the last five years, 208 companies in the U.S. have filed for bankruptcy, amounting to $121.7 billion in aggregate debt.

This is only the beginning for the US onshore oil & gas problems (courtesy of Haynes & Boone)

In Q4 of 2019, there was almost $70B in unsecured debt by E&P companies, plus an additional ~$50B in secured debt.

Did anyone notice that Warren Buffet, the goat, is issuing €1,000,000,000 bonds at a 0.00% interest rate? Time to go shopping.

What Does This Mean for Entrepreneurs?

If you are an entrepreneur that is selling into oil & gas, you need to prepare for the worst-case scenario: sales cycles extended, pilots canceled, and purchase orders going from Net 90 to Net 900.

And while hope is not a strategy, I do hope that your customers are at least not the biggest loser (and this does not reflect this week’s disastrous outcome).

Courtesy of WoodMac

Sequoia has recently warned its entrepreneurs to start preparing for a recession. I have written about this, as well, and believe that you need to start being really smart with your cash and burn rate. As I stated in my 2019 Halloween blog, follow these eight steps if you haven’t already:

1. Make sure you know the right metrics.
2. Secure funding before the recession begins. (If you read my article when it came out, you are ok. If you are just reading this now, it’s too late.)
3. Showcase your growth.
4. Build your reserves.
5. Be ready to swap out your strategy. The pivot: if a customer wants to change how they purchase your product, getting paid is much better than nothing at all.
6. Revisit your financial “needs.”
7. Watch your hiring practices.
8. Prepare to take advantage of the recession.

I left Bernie at the bar if you didn’t notice. He really doesn’t fit into this narrative except for being a punchline for me and a punching bag for his own political party. Maybe Bernie and the oil & gas industry have more in common than we originally thought.

If you are feeling the Bern, time to get to work and drink your Coronas wisely!