There’s a saying in the oil and gas industry that goes, “Always expect the unexpected.” Few would’ve anticipated two black swan events at the beginning of 2020. The destruction of hydrocarbons demand caused by the COVID 19 pandemic and the oil price war between OPEC+ and the United States has caused the industry to face unprecedented challenges.
In these unique times, Plug and Play hosted a special oil & gas super deal flow session highlighting top startups with technology solutions to generate value quickly. Famed industry expert and investor Dan Pickering also provided an insightful overview of current market conditions.
Check out the video of the event:
The Opportunities Behind the Pandemic
Plug and Play’s CEO Saeed Amidi shared a message of optimism and encouragement. “It’s during tough times that new ideas and innovation thrive, and we’ll hopefully come out of this stronger.”
Keynote speaker Dan Pickering echoed Saeed Amidi’s comments. While it is a very challenging time in the industry, it is also an exciting time.
The Volatile Oil Market in 2020
“The recent events were dramatic: oil prices went negative. How in the world does that happen?,” said Pickering. In order to really see the timeline that brought us to that, he reviewed the evolution of oil prices during 2020.
Oil prices started out the year at $60/barrel. The spread of the coronavirus and various supply and pricing decisions by OPEC+ members caused the price of oil to slip to the $20s and below.
During the virtual event, Dan Pickering pointed out that both a market share war and the largest coordinated OPEC+ cut of 10 million barrels/day happened in a matter of a mere four and a half weeks. The bottom fell out of the market at the end of April for the May futures contract, with prices plummeting to negative ~$37/barrel as storage was filled up.
As Pickering explained, “Supply and demand are out of whack. We’ve got way too much capacity and prices are going to remain sloppy for a while reflecting that weak supply and demand situation.”
Pickering pointed out that global demand for oil is down a historic 30 million barrels/day off of a base of 100 million barrels/day. In the 2008-2009 crisis, demand destruction was just 2-4 million barrels/day. OPEC+ cuts of 10 million barrels a day are simply not enough. Historically, forty percent of global demand involved people driving and flying. The speed and magnitude of people returning to normal behavior is what the market is watching for.
What Will Happen to The Market in The Future?
It is going to take a while for market conditions to improve, as futures prices remain in the $40s through 2023. This stress will lead to distress which will lead to bankruptcies. Pickering foresees eventual (but not immediate) consolidation in the sector as companies will combine once management teams and creditors agree to terms. Public company stock prices will also take time to recover. Shareholders will need time to forget the money they’ve lost over the past five years, and companies will need time to prove they can generate returns over the next five years. Historically, the oil & gas industry has averaged 9% of the S&P 500 for the past twenty years, and currently it is now less than 3%. As Pickering said, “we are too important to be 2.5 or 3% of the S&P 500, so we will see a recovery."
How Energy Technology Startups Can Succeed
Pickering shared his perspective on how technology startups can gain traction during this time.
Firstly, corporate customers are going to be increasingly distracted with other priorities. It will be important for startups to find and maintain mindshare of champions who can navigate the buying process. Finding a bell cow will be important as customers are more likely to follow what their peers are doing than being the first adopter.
Secondly, switching costs and the cost of failure are lower for oil & gas companies when the price of oil is $20/barrel vs. $100/barrel. Corporate customers will be more willing to experiment, and the value of doing something new and unique to find efficiencies is higher. Furthermore, in this price environment, corporate customers are less likely to provide funding for pilots but more likely to provide access if the startup can keep the customer’s attention.
Lastly, Pickering shared that the sales cycle could either expand or contract depending on the customer. Some customers could have a mindset of trying anything they can while others could become more risk averse during this uncertain period. Pickering’s final advice to startups, “You better be prepared to move quickly, but you better be capitalized for a customer that might move slowly.”
8 Startups To Generate Value
Altroleum offers a software solution that provides visibility on non-traditional cost drivers in fuel production and uses deep learning to automate workflows related to that data. A “Bloomberg for fuel producers.”
CruxOCM has developed a software solution that enables autonomous control room operations. CruxOCM combines advanced physics-based methodologies with machine learning to help clients improve throughput production, energy efficiency, and safety. The “auto-pilot for control rooms.”
Validere empowers oil and gas companies to know true product quality through real-time IoT data and to optimize logistics and trading with predictive AI insights.
IronSight is a two-sided platform to coordinate industrial field services more efficiently. The software allows operations and service providers to communicate and coordinate work together on the same platform, automating data capture and manual processes.
Mims Well’s software solution orchestrates, automates, and analyzes the entire drilling and wells data process. Exploration and production companies can then make timely decisions based on data.
At Galatea Technologies, they design software to help producers to automate and optimize their waste disposal decision making process allowing them to focus on developing energy assets.
FutureOn is a platform as a service technology supporting subsea field development. The software creates a digital twin of the subsea field to digitize project data, visualize subsea field installations, and enable team collaboration.
SAMP offers a software solution that captures a reliable model or digital twin of industrial facilities and serves as the technical hub where all work is planned and executed by multiple parties using facts.
About Dan Pickering
Dan Pickering is the Chief Investment Officer of Pickering Energy Partners (PEP). PEP manages client assets via energy strategies focused primarily on public markets and private equity. Prior to PEP, Mr. Pickering served as the President of Tudor, Pickering, Holt & Co. and Chief Investment Officer of TPH Investment Management. Dan has spent 24 years as an energy portfolio manager, researcher and analyst, first at Fidelity Investments (where he managed ~$1 billion of energy sector funds), then as Head of Research at Simmons & Company and as the founding partner of Tudor, Pickering, Holt & Co. Dan grew up in Missouri, has a BS in Petroleum Engineering from the Missouri School of Science and Technology and an MBA from the University of Chicago.