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Secondary-Market Prices for Oil and Gas Equipment Poised for a Rebound, Predicts Tiger Group Executive

Oil and gas companies still face some tough challenges, yet the global surge in energy demand bodes well for asset values moving forward, advises Chad Farrell of Tiger C&I  

HOUSTONSept. 14, 2022 /PRNewswire/ — Secondary-market prices for oil-and-gas equipment could strengthen in the months ahead—good news for both asset-based lenders and their borrowers in the energy business, advises Chad Farrell, Managing Director of Tiger Commercial & Industrial, in an opinion piece for ABL Advisor.

“The energy crunch is easing a bit, but global drilling incentives are strong and will likely increase with the onset of the European winter,” Farrell writes, noting exploration and production (E&P) spending could grow by about 30 percent this year.

In the September 8 piece (“Oilfield Equipment Prices Poised for Comeback“), Farrell also notes that the industry has yet to fully recover from its nadir in 2020.

“The oil-and-gas business took a huge hit during the COVID-19 lockdowns, with the price of West Texas Intermediate crude oil dropping into negative territory for the first time in history,” the executive writes, noting that the total count of active rigs in the United States is a good bellwether for E&P.

“According to data from energy services firm Baker Hughes Co., back in August 2020 just 250 rigs were active in the country,” Farrell writes. “While more recent rig-count totals—around 760 as of mid-August—are closer to normal, they still fall short of the pre-pandemic total of 804 rigs at the end of 2019.”

Equipment prices have also not fully recovered. In the piece, Farrell offers an analysis as to why.

That’s because lenders are more reluctant to lend into the space, due in part to long-term performance concerns about companies in the fracking industry, dogged by excessive regulations and legal battles. “Simply put, it is a tougher business these days.”

The labor shortage, too, has taken a toll. “By some estimates, during 2020 the oilfield business lost nearly a quarter of its skilled workers,” Farrell writes. “There are now major questions about the availability of these workers because many ‘roughnecks’ appear to have grown weary of the boom-and-bust dynamics, as well as demands of the job that can include spending long stretches of time away from their families.”

Finally, oilfield services companies of all sizes, including those worth billions of dollars, filed for Chapter 11 bankruptcy protection in 2020 and 2021, with total debt exceeding $55 billion. As a result, the secondary market was flooded with oilfield equipment.

Yet it’s a temporary situation, Farrell predicts.

“Tiger and other companies continue to liquidate drilling equipment, trucks, mud pumps, rigs and other inventory related to those bankruptcies,” he writes. “While this creates downward pressure on prices, these sales will not continue forever. Pricing, as always, will stabilize with time.”

In further explaining his optimism about the sector, Farrell points to a seemingly unlikely contributing factor—the federal climate bill, which stands to lock in years of additional onshore and offshore leasing to oil and gas companies because of concessions to pro-energy-industry lawmakers.

If the world keeps clamoring for non-Russian sources of oil and gas, he continues, borrowers will require plenty of investment capital as they seek to meet the rising global demand. This could spur more small- and mid-sized energy companies to jump back into the arena.

These companies will need specialized equipment to launch or restart operations. Brand-new inventory may not be an option because it is too costly or unavailable from the supply chain.

“Many manufacturers of pipe and OCTG (oil country tubular goods), for example, are still waiting to crank up their mills,” Farrell writes. “The dearth of available pipe is a key reason Tiger has sold nearly 400,000 feet of line pipe and OCTG in just over the past few months. Lenders should continue to monitor the oil-and-gas sector for emerging opportunities. The potential is there.”