Mark: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory show that challenges your old school business practices in a traditional business suit culture. On this show you’ll hear from industry professionals who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help you enhance your company’s growth. I’m your host Mark Van Benschoten.
All across the US we’ve seen prices at the gas pump go up and down. It’s a constant guessing game what we’ll be charged per gallon each week. Naturally consumers and business owners alike are wondering how the volatility of the oil and gas industry will impact our daily lives. Fortunately examining and understanding the current geopolitical climate can help consumers and businesses anticipate what’s to come.
Our guest today is David Shallenberger, the director of oil and gas services, here at Rea and Associates. David has spent a lot of time studying, researching and understanding what impacts the oil and gas industry. Today we’re going to discuss current trends, the volatility of the oil and gas industry, and what consumers and businesses can expect in the near future. Welcome to unsuitable, David.
David: Thanks Mark.
Mark: Really glad that you’re here. You and I have something in common.
David: I’m sad to hear that.
Mark: David, you’re aggressive right out of the shoot. That’s usually … They wait for me to be that way. What do you think you and I have in common?
David: I’m at a loss Mark.
Mark: The lucky 13. You have 13 letters in your last name and so do I.
David: Oh yeah, half the alphabet. Yeah, you noticed.
Mark: Yeah, it’s a mouthful. I thought for sure you would have had more, but it wasn’t that way.
David: Yeah well if you add my middle name in, I guarantee I’m going to beat you. I think I’m at 27 in total.
Mark: That’s cool. What’s your middle name?
David: Lawrence.
Mark: Oh yeah. Can we start calling you that; David Lawrence? David Lawrence, David Lawrence.
David: I wouldn’t recommend it.
Mark: Some other things looking at your bio, you’re all about oil and gas.
David: Yeah, I started with the firm 10 years ago and we had a little niche oil and gas practice and that’s where I got my start. That summer they got rid of the franchise tax. It was being phased out and so they gave me a book and I started reading it.
Mark: I don’t know if you were just sucking up, but when you say; we have a bio on you right? Hopefully you’re aware of what’s on your bio, so what profession would you choose if you didn’t go into accounting? Petroleum engineering?
David: Yeah, I never would have thought that coming out of high school, but it’s actually a really interesting subject.
Mark: Interesting, and then we have the what line of the Rea Way describes you the best and you say, “Listen intently. Let your listening fuel action.” I mean how many references to oil and gas and fuel can you give us David?
David: Well I don’t know because I probably thought I would have picked fail forward on that, but that’s okay.
Mark: Got to get that fuel in there. About oil and gas, so petroleum engineering, exactly what is that?
David: Well I’m not a petroleum engineer so I couldn’t tell you everything about it but just generally the idea of understanding what reserves are underfoot and how to best produce them.
Mark: Underfoot, that’s a good concept. What do you like about the oil and gas industry?
David: The volatility, the economics of it.
Mark: You like that?
David: Oh yeah, I study the economics of it for fun sadly. The geopolitical nature of it as you mentioned earlier, just the whole world is connected by our fuel stocks.
Mark: It is. If there was an X-rated version of Rea Radio on unsuitable here I would say some choice words that you like that. Something about being a sick son of a something. That volatility plays havoc because I think, oh gas prices are going down. That’s good for me as a consumer. I’m going to spend more elsewhere and everything’s good in the world, but everything’s not good in the world.
David: No it’s not. You know we focus a lot on oil because that’s where we see every day. We buy gas at the pumps and fill our cars. We were just talking earlier; went to buy gas yesterday and it was $1.99. Now it’s $2.27. Why is that? Well there is a report from the US Energy Industry, whatever it is. Anyhow they just announced that inventory stock levels were down significantly and that report drove the price of oil back up a little bit. With the fires in Canada and that geopolitical activity that’s happening over in the Middle East, there’s uncertainty there.
Mark: Which drives price changes.
David: Yes, all of that drives price changes.
Mark: We sit here. We’re in Ohio. You’re up in the Wooster office. I’m here down here in Dublin in central Ohio and I don’t think of either of our communities as an oil and gas Mecca.
David: Well you should. You know Ohio-
Mark: Third time I’ve been wrong today, but go ahead.
David: It’s just the third?
Mark: It’s early.
David: Ohio has had several oil booms itself. We had, Wooster at one point around town would have been known as little Houston they used to say. I mean we had several producer companies there in town. We had the boom of Morrow County. Today we are currently in the Utica Shale boom. It’s kind of, we would say almost in a weak point right now, but there’s still a lot of production that could be had from the shale plays. We’ll see. There actually is quite a bit more activity in Ohio than you may realize.
Mark: I don’t realize. I’m ignorant to that. I apologize. I mean just that wow, there’s oil here and you mentioned the fire up in the Canada oil sands. It’s just a hard … I always think of oil as something that’s in the ground. You put a well up. You drill it out, but there’s a lot of ways to get oil and gas.
David: Oh yeah, you know we think of a lot of those big rigs that are out on the ocean, getting that oil. We think of Texas and Houston and out in the Bakken play, but you know independent producers here in Ohio have been producing for many, many years and doing very well. We’re just now in the time when prices as they come down it begins to come into question as to what the future of the industry holds. Lease prices are up with the shale play, so what’s the traditional producer to do?
Mark: Something that I don’t understand and hopefully you can educate me is so I invest in a lease. I don’t understand all the terms. I go onto somebody’s property. I drill a well and I start producing so I have all that investment. I sunk all that cost, but now the price of oil might go down and that causes me to shut down my production because I’ve got all these sunk costs. I’ve spent all my big money. Why don’t I just keep producing?
David: Well there’s generally I mean there’s risk to keeping that well running. There’s costs incurred just to lift the oil itself. Yes you have the initial production cost, but that’s part of the reason why we think that oil and gas production in the United States has not dramatically dropped yet. It’s actually still increased this year-
Mark: For 2016?
David: For ’16 I believe it has yeah because while currently rigged numbers have dropped, production is still going up. There’s a vast inventory of completed wells, or drilled but uncompleted wells out there that basically are ready to be fractured hydraulically and they’re just waiting to be produced. Now if you take a well that’s currently in production and try and just stop it, I mean traditional production in Ohio, you do risk that well going to water the way if you just shut it in.
Mark: Going to water? Is that a technical term?
David: Well I don’t know if it’s a technical term.
Mark: What’s that mean?
David: Essentially when you produce oil and gas, gas pressure helps push the oil out of the formation, but with that you naturally produce water. Well when you shut it in, or really essentially turn off the well for a while, you run the risk of only getting water out of the well.
Mark: So there’s some desire to keep it producing something.
David: Right.
Mark: That’s going to increase.
David: How much do you cut back if you cut back at all?
Mark: Right, right.
David: If you’re like the Saudi’s right now their strategy is to continue to pump more and more and more which is part of what’s beaten down on the oil price today. That and the economic slowdowns in parts of the world.
Mark: Do you think that, I’m not asking you to step into some Sheikh from Saudi Arabia’s mind, but do you think that’s a play on the construct of their wells, like environmentally they need to do that, to keep these things producing? Or do you think it’s more like we’re just going to flood the market so people go out of business.
David: The, well I don’t know about flood the market so they go out of business aspect of it, but I mean from what I read a big part of it is their trying to keep their market share or increase it. With Iran now being able to produce its own oil or more of its own oil, with Russia in economic hardship, they all have reasons to produce as much as they can. Unfortunately some countries, like in OPEC, are unable to produce at a profit right now. Their lifting costs are too high for their oils. They need oil to be $44.00 or $45.00 a barrel or higher in some places. They’re just producing to stay alive.
Mark: It’s just fascinating to me that your term lifting cost, to get the oil out of the ground, that they’re not making … I just find that to be fascinating.
David: Different formations, different depths, different methods of getting the oil out of ground, they all have different costs. Some oil has better or more value to it depending upon what else comes up with the oil. Some oil, like what we process in Louisiana, can be high sulfur whereas Europe wants to produce light sweet. That’s what their refineries are set up for so it all has differences. You have to think not only of your sunk costs that you mentioned earlier to drill the well, but also all of your incremental costs, your lifting costs, your costs to refine and get the end product.
Mark: I’ll say at this point you really know more about this than I do. This is very fascinating. Here I thought you were just a tax guy in Wooster that did a little oil and gas, but you really know what you’re talking about.
David: No, I’m just a little tax guy. This is just a hobby.
Mark: Get off the little part.
David: Get off the little part?
Mark: I’ve got the mike here David. How does the oil and gas supply affect businesses?
David: Well I’m going to look at gas first and by that I mean natural gas as opposed to gasoline. Natural gas, in Ohio and Pennsylvania we have a huge glut right now. In fact with this past warm winter that we had, our storage fields barely took a dent. Our prices for natural gas are extremely low in our area as compared to the rest of the country, and even more so than in Europe or anywhere else because we can’t get it out. We need pipelines to get gas out of our geographic area. There are three planned for Ohio currently to get it out. They’re all facing some measure of opposition.
With power plants switching from coal stock to natural gas as a feed stock, there’s more desire there. How else does it affect it? Chemical companies use some of these gases that are produced, plastics things like that. All of these things can be feed stock for other products down the line. Something like 90% or higher of the products that we use on a daily basis are made from plastics or some type of derivative of oil and natural gas. The more we have of that, the more of these nice things that we have to use. I mean your iPhone. Think of all the different things in there that are only able to be produced because of the fact that we have oil and natural gas. It’s not simply fuel.
Mark: I never thought of that. These pipelines that you mention, how long does it take for them to come on board? I’m thinking years like the economic climate can change. The political.
David: Let’s look just at Keystone XL pipeline that was turned down this past winter. That started the process 7 years ago. It’s going to appeal I think sometime soon. That’s not even putting a stack or pipe in the ground. The ones that are coming through Ohio I think they’re scheduled to be turned on here I think 2017 deliveries.
Mark: Is that, I won’t say guaranteed, but that’s going to happen? It’s not might happen?
David: That depends upon what part of the country you’re in. In New England, Northeast part of our country, they have had several pipelines that have been trying to go in like Constitution pipeline, are getting denied for one reason or another. That’s the frustrating part of this whole business, is the political aspect of it. Economically I can understand that, but with different groups of people with different interests, environmentalists versus pro-development people versus business that perhaps has no angle other than this is the product that we make, they all have a share in what comes.
Mark: Very, very fascinating, so I’m a business owner and let’s say that I am a producer of financial services, Rea & Associates. What concerns should we have about oil and gas?
David: Well other than your personal concerns, I mean I take interest in it because I have several clients that I work with through the firm who are in the industry. I also take interest in it because we have a large presence in Southeast Ohio, actually all the way up to Lake Erie pretty much. The Utica shale play is very important so knowing our clients what impacts them as individuals, but then also we have paint companies. We have rubber companies. We have plastics companies that we work for. These are all feed stocks to them. The more we know and understand, the more we can better understand their business and perhaps help them if they come to some sort of issue.
Mark: How do you feel about, you know you always hear let’s be less reliant on Middle East oil. I mean I always think … I’m sorry?
David: It’s an old data argument.
Mark: Is that a good thing? I mean my naïve, my naiveté, would say yeah, we want American. Is that not?
David: You know we do import oil. We also export gasoline. It really is a world market. I don’t look at it as American versus the world or anything like that in this scenario because of what we’re dealing with fuels everything that we do. There are places we need this for American independence let’s say and they have some argument there. Economically I think someone could make the argument that it’s all one bucket. It’s just a matter of what lens we’re looking at the argument through when it comes to our politics and everything else. That becomes more of a political argument to me than an economic one.
Mark: An economic? That’s interesting. You just said a second ago that we export gasoline?
David: Yes.
Mark: The United States exports gasoline.
David: Yes.
Mark: Is that a recent phenomenon?
David: I don’t believe so.
Mark: I learned something else today. Let’s call it a day. Wrap it up. Shutting her down. Wow, I’m just intrigued by that. I did not know that. We, wow, okay.
David: Wow, I made you speechless. That’s got to be a first, or at least stuttering.
Mark: You were in the 6th grade with me. I stuttered quite a bit. Any advice to a business owner besides one of our clients in, or any business owner not in the oil and gas, anything they should be doing? Is there a hedge they should be doing? Is there just overall awareness? Any recommendations?
David: You know I like to watch it because as I mentioned, it’s a feed stock for so many of our businesses, so what is on the horizon? How is that going to affect your business? If you use a lot of natural gas in your business, then you know what? Hedging might make sense. If you are AEP and you’re turning your electric generation from coal to natural gas, I’m absolutely certain that they hedge things like that. It’s having an understanding of what your fuels are or feed stocks are for your business and then so that you can project out looking forward as opposed to as accountants we typically look backwards. As advisors we look forward, okay what is going to impact the business in the future the most?
Mark: Are we ever giving any of our clients, I’m not asking you to give up the gold and grail here, but to say you should be switching to natural gas? Are we at that point?
David: Well, I don’t know of actually having that advice for anyone. I mean that would be a high fuel usage. I mean you’re typically looking on that, switching from coal to natural gas to generate electricity. I’m sure there are others. We have some folks that use natural gas to run generators to run the electricity for their manufacturing plant. Often times, they may be Amish that do that, but they’re still running those generators for their plants. Some of them are already doing that.
Mark: David, I’ve got to tell you I’ve really enjoyed this and I’ve learned quite a bit and I want to go back to something that I said in the beginning. Listen intently. Let your listening fuel action and I hope that the listeners take that to heart today that there is much more to this oil and gas than just what you’re paying at the pump.
David: Absolutely.
Mark: There is some business aspects to take notice of as to your oil consumption or your energy consumption I think would be the right word to put that, and to see where that’s coming from, and just to have an overall awareness. Another thing I learned was that we export gasoline. I did not know that, but that it might not be an economic decision, but there’s a lot of political decisions going on with our energy.
David: Yes, absolutely.
Mark: Very, very interesting and David before we wrap up there’s always one question that we ask every guest. Hopefully you’re prepared for this. You’re only our 1800th episode. If you could have one super power, what would it be?
David: Well, I thought about this on the way down and I actually think invisibility simply because there’s a lot of conversations that go on that I would love to be a fly on the wall.
Mark: Okay, I appreciate your clarifying that because I thought you were going the Kyle Stemple route.
David: I don’t know anything about that, nor do I want to.
Mark: You’re a smart man once again David. Well that’s our show. Thank you for sharing your expertise with us today David. If you’re looking for more business advice that can help your organization, visit www.reacpa.com/podcast and don’t forget to check us out on iTunes or sound cloud where you can subscribe, rate, and leave a comment. Thank you for listening to unsuitable on Rea Radio. Until next time I’m Mark Van Benschoten encouraging you to loosen up your tie and think outside the box.
