With oil prices still down, it looks like some of the smaller corporations have bitten off more than they can chew project-wise -- and their purchasing choices are beginning to weigh them down dramatically.

With big names like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), the little "shops" thought take on the giants; but with oil prices moving upward at a snail's pace, there's no question financial backing should have been their first play.

On this episode Tyler and Taylor take a look at why this was probably inevitable and what it could mean for investors long term. 

A full transcript follows the video.


Taylor Muckerman: It was the best of times, now it's the worst of times in the oil patch.


I'm Taylor Muckerman with Tyler Crowe on the energy edition of Industry Focus.

Tyler Crowe: How's it going, man?

Muckerman: Not too bad. We're without Sean O'Reilly, our host. If we flounder...

Crowe: We're going to be a little rudderless today. If we have the tendency to go off on a very long tangents for a long time, this could be a 40 minute talk. We don't even know. We don't have anybody to keep us on track.

Muckerman: We did get a request from someone in Japan to extend Market Foolery and Industry Focus to 20 to 30 minutes. I don't think it's going to happen.

Crowe: Not today. We'll see. Maybe a little down the road.

Muckerman: I guess, first off we can start with a story that was almost inevitable when you look back at what's going on in the oil industry right now. That is, small companies that sprung up in 2010, 2011 got ahead of themselves, are going bankrupt in the oil patch. Mostly service companies right now. You have to imagine that there's some producers out there in the same boat.

Crowe: Surprise, surprise. When people were out and it was $100 in oil and basically any bonehead with a hope and a dream and a drill bit could go out and make money. When we're down to $60 it's actually not as easy to make money and those who bought a little bit too much equipment, got a little too fancy; I thought it was very telling in the article that you had sent to me.

Muckerman: Yeah, this article from Reuters, by the way.

Crowe: Article from Reuters. A company by the name of GoFrac and $35 million in revenue and they talk about how their executives are riding around in a private jet and they already had a private suit at the Texas Rangers stadium.

Muckerman: Yeah. Living the high life.

Crowe: Living the high life.

Muckerman: So, this company started in November of 2011.

Crowe: Meteoric rise when everybody in Texas wanted to drill for oil. Then everybody got thinking they were riding high on the hog, then all of a sudden when you grow production that fast -- demand grows in oil, but it doesn't grow that quickly. So when you have that much production coming online, eventually you're going to see a rough spot. Reading what it said, it's not that I have no sympathy for them, but...

Muckerman: Yeah. They went from 550 employees to 6.

Crowe: Right. They really have struggled, but if you look at it, it seemed like these people that pushed really hard didn't really quite anticipate the possibility that if you grow oil production that fast, there is a possibility that you could see a price crunch and you may need to be ready for when that happens.

Muckerman: Yeah. This company, like you said; $35 million in revenues. That's what they started with alone in November of 2011, and to see this company that says they would move to a 22,000 square foot office on the 12th floor of Burnett Plaza -- which is apparently one of Ft. Worth's most expensive buildings in the area.

Crowe: Fancy, fancy, fancy.

Muckerman: I think back to going to Houston to visit National Oilwell Varco (NYSE:NOV). Here's this massive company, one of the best in the industry, way more than $35 million in revenue per month and they're on the outskirts of...

Crowe: They probably do, what? $35 million an hour, maybe?

Muckerman: Probably. I would imagine so. This company is now -- their headquarters are on the outskirts of Houston, tiny little buildings. There's a few of them. So they have a little "campus", but I doubt that the area they're in is nearly as prestigious as...

Crowe: As this high rise in Ft. Worth.

Muckerman: Yeah. You've got this company, so you look at it and they doubled their employee count way more rapidly than they should have, none of the big guys -- if you look at Halliburton, Schlumberger, Baker Hughes (NYSE:BHI), the three that this article mention -- they're probably going to stick around for a while. They did a double...

Crowe: Take some big employee cuts now, save some costs. If things start to pick back up they can hire back on that. When I look at this from an investor's standpoint, the thing that stood out to me most -- and a valuable lesson, I think everybody can learn from what we saw here -- is the value of being a well-financed company and having access to cheap money for a long time because of size, because of economics of scale, the ability to adjust, adapt; when things go wrong.

You look at somebody like Baker Hughes, or National Oilwell Varco; we're talking about companies several billion dollars per quarter in net earnings, even when stuff hits the fan like it has recently. They still have investment grade credit ratings. Better than AA in S&P rating systems. So if you look at something like that, the ability to raise cheap capital, and to be able to work your way through these sort of things, it just goes to show that is an extremely valuable thing in this business when the industry cycles go down.

Muckerman: And if you want to take advantage of when the industry does come back, GoFrac is apparently auctioning off all of its equipment.

Crowe: Yeah. At the auction I think they got half for what they actually bought it for.

Muckerman: Just a couple years after they bought it.

Crowe: If you are looking they are not the only ones that are going to go bankrupt.

Muckerman: No.

Crowe: They're not the only ones that are going to be auctioning off equipment. So if you want to go bargain hunting; time to go buy some fracking equipment down in Texas.

Muckerman: Hey, a little wildcatter action you go down to Ft. Worth, get a frack rig and bring it back to...

Crowe: Just don't take out the 12th floor in Ft. Worth. Whatever building that was.

Muckerman: Onto a much broader topic impacting the entire industry, but an article -- when you look at Zero Hedge you take this stuff with a grain of salt. An article on the 16th, peak oil: myth or coming to a reality? It talks initially about peak oil supply, and how that was thought in the '70s to be accurate. Production started to decline, but clearly production's been increasing ever since. It goes in to change that theory into "peak oil demand". What are your thoughts?

Crowe: Well, this is not the first time that I've heard the 'peak oil demand' theory. It's come up the last couple of years. Everybody seems to get excited about the idea that developing nations are starting to convert over to alternatives. You're seeing a little bit of natural gas incursion in things like replacing diesel engines, you're getting into electrics and hybrid vehicles in the gasoline market; which suggest that -- in developing nations where you have a more mature market and purchasing power is a little bit better -- you're seeing a small conversion over to this.

When I read the article it showed some very spectacular growth numbers, growing at 100%, or something like that. The thing that I saw most glaringly about this article, more than anything else, was the fact that it took some small data points that are over a 1 or 2 years period, and they're trying to correlate that out for the next several years. Saying "This is the trend that's going to happen." I think it was "oil demand only increased by 0.9%".

Muckerman: Yeah, it's less than 1%.

Crowe: Less than 1% over the past year. I think that was according to the recent study by BP. They do their big global energy statistical review.

Muckerman: Which is worth the read if you're interested in energy, or just the world in general.

Crowe: Fun? Maybe not. I just said 'fun'.

Muckerman: You could make a fun drinking game out of it.

Crowe: It goes to show how boring of people we really are. I just said how fun it is to look at data tables.

Muckerman: Arrr.

Crowe: So, when I look at that I see a one year statistical thing. It's a little less than 1% demand. If that were to continue for several years then I think that theory could be a little more in play. But if we look at 2014, take for example developing economies of Europe; they were in a place where European Central Bank is printing money very similar to the quantitative easing that we had here in the United States. Their economy is not doing as well as they should have accepted. Russia is actually in recession right now because of the sanctions that they've been working on for so long.

China's slowing down a little bit and if you look at things like that you can kind of understand that it's not just this isolated "Oh, it's happening because we're converting over to electric." It could just be in large portion, a fact that it could be from slowing economic growth, which is a major driver of gasoline. Probably of anything else in the world, it is the largest driver of demand.

Muckerman: Yeah, it's something like 44% of the end products coming from crude oil is gasoline.

Crowe: So, if you look at that and you see a stagnant economy, it translates pretty well to slowing gasoline demand. Yes, oil is cheap now because we have ample supplies, but that's not enough to juice economic growth when there are so many other factors that go into that sort of thing. I'm a little hesitant when I read something like this, that kind of takes that one year statistical aberration and says "This is the crowning peak, this is the turnover point."

I want to see a little more time pass of that trend actually continuing before we can really say that it's definitive. Even if it were to happen, let's say that's true. We're still a really long way before oil, gas, fossil fuels like that are not useful to human consumption.

Muckerman: Agreed. A couple points to what you're saying. On the "long ways away"; he throws around some percentage growth statistics on use of electric vehicles, which would obviously reduce gasoline demand, but when you look at growing a new industry, percentage numbers are going to be outlandish if it's succeeding. On an aggregate level, electric vehicles are a minute portion of the overall global industry.

Crowe: Yeah. I still believe they're less -- they're easily less than 1% of total automotive sales.

Muckerman: Yeah.

Crowe: Today.

Muckerman: Yeah. They were tossing around -- he mentions facts that other people have brought up. EV growth rates of 120% in China, 69% in the U.S., and 45% in Japan. Yeah, that's great; but we're talking around 1% of global...

Crowe: That could be going from 15 per year to 27.

Muckerman: Sure. Yeah.

Crowe: Granted, it is much larger than that, but if you look at context of total automotive sales, that's -- we're still a long ways to go before that's going to have a significant impact on oil. I think if you're looking at it from an investing perspective -- let's take you and I. we're relatively young people in comparison to the dozen people that actually listen to this podcast.

Somebody like us, we may be able to look at some of these really long tail things and make some investments on the possibility that 25, 30 years from now are going to actually make a difference in our portfolio. However, if I'm somebody 5, 10 years away from retirement looking to really lock down my position; I don't see any of these being as valuable, versus the dividend checks that you could get from an oil and gas company.

Muckerman: Yep. I agree. It's definitely something that you can write off if you're investing for 5 to 10 years. If you're investing for the next 30; sure. Maybe you want to sell an energy position in the next 10 years, but for now -- especially after what's happened over the last 6 to 8 months...

Crowe: Dividend yields look awfully good right now, people.

Muckerman: It's an interesting time to take a look. Then one quick point where you talk about slowing growth affecting oil and low oil prices being a part of that. A lot of times people don't give credit to the impact that the oil industry has when prices are high on the growth of the global economy because it does support so many industries based on the demand for steel, or the demand for other external factors that go into making these offshore rigs, these drill bits. The industrial side of things that it supports.

Crowe: Yeah. We could take a little -- take this number with a small grain of salt. When I heard this it was a little outlandish, but I remember when they were trying to propose the Keystone XL pipeline. They said that thing would support 500,000 jobs in the United States.

Muckerman: Granted, they were probably a little temporary.

Crowe: Right. A lot of construction, steel production; when I saw that production I was the highest one I saw. That was also including the extra bartenders that would be needed to satisfy the steel maker.

Muckerman: Right, as they hop on their way down there.

Crowe: It was very, very ambitious when I saw it.

Muckerman: You have to imagine half of that would be legitimate, right?

Crowe: Maybe half.

Muckerman: For at least a couple years.

Crowe: You get the one number, it's like 35 permanent jobs that are actually pipeline inspection, then you get the thousands of all the ancillary benefits. You pick some number somewhere in the middle, probably on the lower side.

Muckerman: Yeah, that's right.

Crowe: Then you're going to get what you need, but it goes to show...

Muckerman: And that's just one project.

Crowe: Yeah.

Muckerman: Granted, a massive one, but...

Crowe: Yeah. It just goes to show that the oil and gas industry has a much more profound impact across other sectors than just the 10,000 roughnecks on Schlumberger's payroll that happen to get cut in this past year.

Muckerman: Yeah. The 550 employees from GoFrac didn't build the machines that they were operating.

Crowe: Exactly.

Muckerman: All right, guys. Well, that's our show. That's not close to 20 or 30 minutes, but we crossed the 10 mark.

Crowe: We'll try to do a little bit better next time.

Muckerman: That's right. We'll have Sean. So maybe he can add a bit more hot air to our discussion. That's it for me, Taylor Muckerman, and Tyler Crowe. Industry Focus energy style. Thank you very much.