Geopolitics of oil

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Shashank Soni, MBA 2014-16, Vinod Gupta School of Management, IIT Kharagpur
Long gone are days when the price of oil used to be above $100/bbl. Oil companies were growing fast and plundering profits every financial quarter. During this time, it was easy to raise capital and throw fat steak dinners. Then a year ago, oil prices jumped off a cliff landing at $50/bbl. A rude awakening for those companies who never saw it coming. These companies are now looking to leverage costs and improve productivity to survive in this new environment. They have a few tools up their sleeves that they can use to persist in this price setting.

One of the major tools is issuing stock or debt. The companies that have good balance sheets can issue stocks in the capital markets and attract investors to finance their operations. Although this dilutes their share price, they need capital to sponsor new projects. Investors believe that the share value will only go up from this point based upon their faith in the management team and general expectation that oil prices have bottomed out. Companies with relatively weaker balance sheets might find it as the last resort. It buys them some more time to turn around their company and create value for shareholders. Another option is to sell some of their assets. These companies will look for private equity buyers that see value in this proposition. These assets would cost a fortune if they were put on sale during the $100 oil price setting.Another way of subsiding the risks is to delay drilling. Oil companies can leave the wells uncompleted and wait for the right time to start producing to get better returns. One of the major ways of improving bottom line is to reduce costs.


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