$70 Oil and Throttling “Back Down to Zero”

Source: Wikimedia Common

For a few weeks we’ve been hearing rumblings in the news of $65-$75 a barrel for West Texas Intermediate. We just read an article this morning about how Goldman Sachs has forecasted a WTI price of $70 for early next year, with the price increasing back to $80 by 2016 as the more inefficient producers drop out of the market.

We help Oil & Gas companies that struggle to get their capital equipment projects done on time and profitably, so the following article excerpt really got our attention (emphasis ours):

Precision Drilling, which specializes in oil field services, has the flexibility to immediately stop building new rigs … ‘If these [oil] prices discourage our customers from expanding activities, we can throttle right back down to zero [new] rigs if we chose to,’ …

Precision Drilling is in the land market–which traditionally turns on a dime–but the comments raise interesting questions for any Oil & Gas business that has enjoyed a great “seller’s market” these past few years:

    What will you do differently if your customers “throttle right back down to zero”?

    Will late deliveries still be acceptable?

    Will you be able to keep covering present project losses when that backlog of future projects dries up?

    Will your current framework for delivering projects still be viable?

In our view, only those businesses that figure out how to deliver their projects on time and profitably—in a manner that’s predictable and repeatable—will maintain their competitive advantage, regardless of market conditions. So where does your business stand?