The Motley Fool

3 Charts to Reveal the State of the Oil and Gas Industry Right Now

I used to own an oil and gas services company many years ago called MTQ Corporation Limited (SGX: M05), but sold it when oil prices crashed in 2014. To provide some background, MTQ specialises in engineering solutions for oilfield equipment and carries out repair and maintenance work for oil majors. MTQ services the blow-out preventers for oil rigs (which prevent the oil rig from exploding due to the high pressure of the extracted crude oil) and is the authorised partner for some of the world’s largest original equipment manufacturers (OEM) in drilling equipment.

My previous assumption was that the oil services industry would be less sensitive to oil prices as it was located at the lower part of the oil and gas cycle. This was proven wrong as the collapse in oil prices cascaded down to lower repair and maintenance work for companies like MTQ, resulting in multi-year losses since then. However, I continued monitoring the group and in MTQ’s latest annual report, the chairman’s statement contained three interesting charts which shed more light on the state of the oil and gas industry.

Crude oil price

Source: MTQ Corporation’s AR 2018/2019 Chairman’s Message

As can be seen in the chart above, oil prices crashed spectacularly twice during the last twenty years – once during the Global Financial Crisis, and a second time during the 2014-2015 period. The second crash was fairly sharp – around 67% from US$120 per barrel to US$40 or so per barrel, considering there was no global recession or crisis which triggered it. Oil prices staged a slight recovery from the trough to around US$55-60 per barrel now, as demand from countries such as China and the USA remains strong.

Drilling rigs deployed

Source: MTQ Corporation’s AR 2018/2019 Chairman’s Message

The second chart shows the five-year trend for drilling rigs which have been deployed around the world for the extraction of crude oil. Since the collapse in 2014, the USA has increased its number of drilling rigs from around 500 to 1,000, which indicates a modest recovery in rig utilisation. This trend should also benefit companies which are located in the mid to down-stream of the oil and gas supply chain, such as Boustead Singapore Limited (SGX: F5D) and MTQ. It’s also interesting to note that rigs deployed in the Middle East have been unaffected by the crash in oil prices as their cost of operations is much lower, therefore even with the oil price at US$40 per barrel, such rigs were still generating profits for their owners.

Contracted oil rig utilisation

Source: MTQ Corporation’s AR 2018/2019 Chairman’s Message

The last chart above shows that rig utilisation rates have begun trending up since early 2017, and this is a healthy trend which shows that more oil rigs are being “restarted” rather than being mothballed. As there will be a lag time between the restarting of a rig versus contracts flowing down to other players within the oil and gas supply chain, investors should expect more positive news in time to come.

The Foolish conclusion

Early in June, I had written about whether oil and gas companies were out of trouble. These three new charts seem to indicate that though the recovery has been slow, it seems to be gathering pace as more and more rigs are being deployed compared to the trough of the crisis. Investors may wish to selectively look for strong oil and gas companies with good capabilities and balance sheets in order to ride the eventual recovery.

Want to keep reading and learn more from The Motley Fool? There are many important things we think every Singaporean investor should know before jumping into stock picking—and we’ve laid them all out in our eBook, which we think will help you become a Smarter, Happier and Richer investor. You can download the full e-book FREE of charge here

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Boustead Singapore Limited. Motley Fool Singapore contributor Royston Yang owns shares in Boustead Singapore Limited.