Low oil prices will create more efficient oil producers and service businesses. The current downturn may be hard for those in the industry now, but a down market drives efficiency.
Prices won’t stay down forever. In fact, there are signs it may come back soon. Storage levels are the only thing really keeping oil prices down right now.
Rig counts are down drastically, production is increasing more slowly than usual. If production drops low enough to remain under storage capacity levels, prices will begin to tick back up. If storage fills, futures contracts activity will slow and margin calls will drop prices to the $30’s for a short time before prices start to come back up.
So how does a down market drive efficiency? It’s a simple answer. Money isn’t rolling in, work is slow, the outcome is sharper focus on cost controls and time to implement them.
In Odessa, Texas you’ll meet many multi-millionaire that are simply successful in spite of themselves. When energy prices are up, there is plenty of money to be had, even for those who aren’t really deserving.
As soon as a down market arrives and prices drop, those businesses run by fools soon fail. Those businesses run by smart leaders adapt. They focus their energies on their core competencies, they tighten spending, they invest in their base. When prices come back, these are the companies that have survived and are poised to thrive.
As an investor, right now is the time to read energy related company reports closely. Look for the ones who are making themselves more efficient. During the boom, everyone was chasing a buck, procedures were relaxed, work was done quickly and sloppy. The companies to invest in now are the ones who are able to tighten those procedures, improve on fundamentals, and heal the wounds related to having a business run a full capacity for so long.