Why This Oil Crisis Is Different To 2008
They say history repeats itself, and given the cyclical nature of the oil and gas business, many look to the past when trying to guess what is coming next, but past experience doesn’t always offer an exact model for the present.
Much has changed between the 2008 oil and gas downcycle and the one the industry is currently working through today. The drop in oil prices that started in 2008 took place against the backdrop of the Global Financial Crisis, aka The Great Recession. Economies all around the world sputtered to a halt, and demand for oil dropped. Lehman Brothers filed for bankruptcy protection on September 15, 2008. It was the all-time largest bankruptcy filing.
Oil prices dropped from historic highs of $144.29 in July 2008, to $33.87 five months later. OPEC, the world’s traditional “swing crude oil producer,” took its traditional actions, cutting production by 16 percent in eight months to bring stability to global prices, which was led primarily by the group’s largest producer, Saudi Arabia. Crude oil consumption and production dropped by 1.5 percent and 1.2 percent, respectively, before coming back to parity from 2008 to 2010. U.S. producers pulled back on drilling operations until prices began to improve, switching from conventional drilling to horizontal drilling following the 2008 crash. And except for the banks and car companies, there wasn’t much going on at the bankruptcy court house by the E&P or OilService (OFS) companies.
In aggregate, debt-to-EBITDA for the E&P companies was approximately 1.6x, and the average capital efficiency (EBITDA per BOE divided by finding and development costs per BOE) was 230 percent, while for the OFS sector debt-to-EBITDA was 0.9x, while capital intensity (capital expenditures divided by EBITDA) was 62 percent. The companies, in general, had the cash and balance sheet to work through another downward descent in the 7th commodity cycle since 1981.
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