Quote:
Originally Posted by Surrealplaces
I don't think anyone knows how the price drop will affect things. There will be some pain, as I'm sure some activity will either scale down or be postponed. How much actual pain will be felt is anyone's guess. The last time we felt some pain of any kind was in 2008, and you can see from the chart that Oil was really spiked and then really dropped, but you can also see from the chart that oil was around the $70.00 mark in 2010 and we had some good population growth and good economic growth at that time.
Keep a few things in mind....
-Calgary is heavily involved in oil, but also other facets of the industry. Gas, R&D, Pipeline, and Admin. The admin part is mostly static. A few people may get laid off here and there, but mostly it's static. Pipeline projects are up and down, but are very long term projects. If Keystone got the go ahead today that project would gear up instantly regardless of the price of oil. Gas is mostly static. It's been at low prices for a long time and chugs along.
-Calgary also has other head office and non O&G stuff. Head office's like Westjet, CPRail, Shaw, Agrium, ATCO, and some other decent sized companies. Also a fair amount of regional head offices.
-At the moment Oil, especially the oil sands is a long term thing. Sharp price drops may postpone projects, but it doesn't change the investor outlook for long the long term. You just have to look at the chart below and see that the prices has jumped around a lot in the last 10 years, but Calgary has boomed through almost all of it. The blip during 2008 caused some slowdown but was best described as a speedbump.
The worst thing about this, is the uncertainty. Could Oil go as low as $40 or $50 bucks a barrel? There could be quite a bit of pain if it went that low for long periods.
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My take as someone who works in the industry:
Filling new office towers requires headcount growth. What we are likely to see instead is projects being reevaluated, and some of those projects will not go forward. At the very least, this would result in workforce reductions at EPCs. Furthermore, it's likely that facilities engineering and development groups will be carrying some slack if future projects are slowed down or shelved. Head office administrative functions are not as static as you might think, as there is less of a need for shared services like HR and IT when you are not hiring new employees. If companies go into cost cutting mode, they will do things like consolidate business units and engineering groups, which eliminates management positions as well. There will be reverberations through financial and business services to oil companies, as capital budgets are reduced.
I am generally an optimistic person, but pragmatic as I've been working in this industry long enough to see a few cycles. Everything points to this being a longer term downturn as it is driven by a supply glut (like oil in 1985 or natural gas, which has been in a bear market since 2006) as opposed to a demand shock (like 2009). The key difference here is instead of simply moving up/down the supply curve based on demand, the shape of the curve is in fact changing.
Costs in the US shale plays have dropped dramatically. Many companies have raised their type curves 30-50% in the last 2 years, which means almost a corresponding 30-50% reduction their breakeven costs (though not quite because of more expensive completions). People are talking about how shale oil isn't profitable below $80. Well they are looking at data from 2 years ago, and today shale oil can be profitable at $60 based on the numbers I am seeing. Again, you can look at the analogy of natural gas. A few years ago, people were saying how there is no way shale gas could be profitable below $5.00, but today many shale plays are profitable well below $4.00 gas.
Fortunately, we have some very good shale plays in Canada, but they don't employ nearly as many people as oil sands. Think Tourmaline who only employs around 200-300 people for a 150,000boepd company vs say Devon who still has 10 times that number of office staff in Calgary for less production (post divesture).
On the bright side, hopefully this means a castration of the Palliser Balls.
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