The 'Digital' Adoption Era of Oil & Gas
None of us have seen such a global economic contraction that has coincided and/or created this global oil meltdown. On Monday, I kept taking photos of my screen capturing the WTI (West Texas Intermediate) oil price for May deliveries decline into unprecedented territories: $14, $11, $0.13, and then it went negative, -$2.29, -$3.70…The workday was over.
I could no longer refresh my screen. Certain disconnected politicians celebrated and then retracted their comments about the demise of our industry. “Human sacrifice, dogs and cats living together, mass hysteria!”
As I write this article a day later, the WTI current spot price is $5.00. My grandfather warned me about this volatile industry. What are we doing here? This industry is no stranger to volatility. It is amazing to observe in real-time how this industry prepares for the worst. However, there is no doubt that this moment is unprecedented and will serve as a key cornerstone that will be used to describe when and how oil & gas became digitally modernized. My original investment thesis was just a decade too early.
What should we expect in the new era of energy? It is my personal view that the following will take place:
There will be winners and losers, so choose carefully
As written last week, not everyone is going to make it out of this alive. So choose your customers carefully.
As Geert writes in his note, "analyze your customers’ buying behaviors in a crisis." How well do you know each customer? This is a good time to truly embrace your Sandler sales skills and understand pain, budget, and the decision-making process. “...you are better off focusing on assets and customers that are 100% owned and/or controlled by one - or two - IOCs, who will listen to anyone with smart solutions to help them preserve cash.”
I would take it one step further and ensure you understand the decision maker's personal pain. There are many good blogs on understanding pain, the pain funnel, that people buy due to personal pain vs. business pain, etc...if you do not already understand this methodology, it is a good time to start since you will need to become a maestro. In other words, do you understand why your customer personally needs to see your solution implemented?
Geert gives another important piece of advice: Seize moments of negotiations. Even if you have lost a contract during these hazy times, it may not be over. There are many renegotiations currently taking place. Call your customers and prospects NOW and touch base to determine if all decisions are final. And don't forget, many of your competitors will also be hurting and some will altogether bow out. So be ready. Be vigilant. Be an entrepreneur.
What happens if you are on the downside of this reshuffle? What we have witnessed throughout history is that the losers will start new companies. And many of the most well-known companies have come out of a recession including Disney, EA, FedEx, GE, General Motors, HP, IBM, Microsoft... What about oil & gas? Let's see.
External Innovation Adoption will be Accelerated as we have seen before
There will never be a better time than now if you are an entrepreneur in energy. As I outlined in multi-post articles regarding my energy investment thesis, this cornerstone moment will only accelerate the key foundations of context that will enable adoption and answer the question, why now?
Without this (un)fortunate kick in the face, the E&P space specifically has owned the award for the longest time for a technology to go from idea to 50% market penetration: 31 YEARS! This McKinsey study (in which I have been using for 10+ years and it was old back then) is antiquated and needs to be updated; however, directionally states that being an energy entrepreneur will take time. And as an investor that has been around this space for a decade, I can attest. However, as we have witnessed in the past, external technology gets accelerated and adopted during volatility and low oil prices.
Technology has been kicking at Oil & Gas’s door for years; however, digital has been adopted into the oil & gas industry during 4 key phases throughout history based on important external context:
Phase I (Machine Learning) - In 1980, while Pac-Mac was being launched and IBM was hiring Paul Allen and Bill Gates to build a new operating system, Aspentech and OSIsoft (also known as Oil Systems Inc) form to go after the industrial world with computer tools aimed at improving operations of processes using ("machine learning"). Both Aspentech and OSIsoft's PI (stands for Plant Information) System are still in operation 40 years later.
Phase II (3D Seismic) - by the early '80s, as oil was freefalling, Compaq Computer and Sun Microsystems were being launched to take advantage of the microprocessor and falling hardware prices. Workstations became mainstream allowing companies to process a lot of data on local machines. The same year Compaq and Sun launched, a team of 4 founders launched Landmark Graphics building workstations to tackle the 3D seismic problem. This is still one of the key successful use cases being mentioned by entrepreneurs tackling oil & gas.
Phase III (Digital Infrastructure) - The Internet became real in the mid-to-late '90s. I joined Dell in 1994 and rode the wave into the year 2k. The "Internet" enabled a new breed of infrastructure technologies focused on the oil & gas industry. RigNet connected remote assets creating a strong value proposition that was not capable just years prior. P2 launched as an energy-auction exchange in 1999 focused on upstream and eventually became a leading platform. The leading data provider Enverus (DrillingInfo) was founded in 1999 down the street from my home in Austin, Texas. Upstream exploration software company known as Petrel (Technoguide) was formed in 1996 creating a better user experience based upon Windows OS. It has become the industry's primary upstream platform. Context matters and the Internet unleashed a new paradigm (no pun intended) and technical capability that previously was not possible. As you see in my chart below, this period brought about the largest number of "winners" in oil & gas digital tech.
Phase IV (Cloud + Mobile) - Many believe that the current era of cloud computing was kicked off and coined around 2006 as both Google and Amazon were taking center stage on the nomenclature and capability. The iPhone launched a year later. Almost a decade later, the cloud and mobility era seeped into the oil & gas industry becoming the two most important investments in digitizing oil and gas. For the first time, users had global access to data anywhere, anytime, and on any device. While there are many startups that formed to take advantage of this new capability (for oil & gas), a few have already become unicorns. I started SURGE to take advantage of this context; however, we were too early. Is it possible that the Cloud + Mobile era will be pushed into the new Covid-19 era?
Phase V (Covid-19) - We now have a scenario where there is huge volatility and low oil prices. Oilfield Service (OFS) companies are cutting staff and furloughing others. Many of the independents will not survive if oil prices continue to stay in this realm and were always too small to have their own R&D. The large energy companies will preserve cash and reduce R&D budgets. Will the great generational crew change also take place during this season? At the same time, investors already being pressured due to environmental concerns are growing weary of the volatility and massive debt required to play in oil & gas and are starting to see new energies as a "flight to quality" (more stable cash flows and possibly larger returns on a risk-adjusted basis). What does this mean? It's an awesome opportunity for there to be a new phase of innovation that will surpass the previous ones and quite possibly eclipse innovation adoption for all previous phases combined. You heard it here.
Will Covid-19 become the era that introduces the new "digital" oil & gas company as I have written before? Will more technology winners come out now in this phase than all other phases combined? What say you?
Capital will be difficult to raise, Be Wise
While there will be a bounce-back on the oil price and industry (although the timing is everything), wise cash managers will be rewarded. My father always told me to be prepared for the hurricane (multiple and long-term rainy days).
First of all, if you manage cash well AND hit your financial projections as promised to investors, you will set your future and business into the Hollywood Walk of Fame. At this point, anyone that can deliver on their original promise will be seen as a Shaman and Hero.
Second, if you are a student of Sandler (or any good sales methodology), you will realize that under-promising and over-delivering is the currency the builds trust and transparency. Now, over-delivering is not sand-bagging but rather having self-insight and the ability to execute on your rhetoric.
Third, there is a lack of capital, investors are scared and circling the wagons. This is not the time to be needing cash due to many investors calling a pause on their new investments and/or switching their focus on new energies that deliver better risk-adjusted and stable returns. While most of us are focused on protecting and preserving capital for our existing portfolio, new investors are looking for a reset of valuations and waiting for prices to fall below valuations. There are many startups and investors currently walking around in shock. For many of you that raised capital on inflated prices, are still burning cash, and need more will have to face the music and reset their valuations in the new normal. Kicking the can down the road while a breather for management, common shareholders, and existing investors will only delay the inevitable and create more vulnerability for a startup that requires future rounds of investment.
Fourth, if you are amazing at managing your cash and currently do not require any, there will be investors that have the capital (and LP commitments that require them to invest it) will come knocking. You need to ask yourself if their interest to invest is in your self-interest. Having the option and financial freedom to say no is very powerful.
Fifth, if you are able to take market share during this downturn, go for it!!! And call me. However, still operate under rule #1: be prepared for the hurricane (multiple and long-term rainy days). In other words, do you have enough cash for when you miss your forecast? As an entrepreneur, it is easy to keep your head in the clouds...but as Casey Kasem always told us, keep your feet on the ground.