March 7, 2020 will be remembered as the day the world changed. Not only for what it did to the oil and gas industry, but for the way we think about making capital investments in energy. Not a single company has sold a barrel of crude yet for $31 (remember, the market is trading April barrels right now although spot prices have sank in response at were $31.31 yesterday) but the damage is done, and here’s why. The risk that Saudi Arabia or Russia could snap their fingers and in one day collapse the oil market by 25% (on top of the 33% it was already down) wasn’t contemplated as even possible. Even after 2014. Until today. People will say “we’ve been here before, it’s a boom and bust cycle.” Not when we are the world’s number 1 producer. And not when we are the only ones who have grown in 5 years.

Imagine the Russians, just having been sanctioned by the U.S. for Rosneft trading with Venezuela, and reading their RBCRichardsonbarr.com feed for company’s 2020 guidance. Oh, isn’t that nice. Pioneer growing 10%. EOG, 12%. Concho, 12%. Ummm… do they realize that worldwide demand IS DOWN and these a$$holes are increasing production?! Not on my watch they aren’t…. Here’s a statistic that has been conveniently ignored: since 2014, the U.S. has grown 4.5 mmbo/d while OPEC+ has cut 2 mmbo/d. And when the Russians said no to the U.S., and then Putin didn’t return MBS’s phone call…. BOOM. And that’s why this is different. It’s personal.

Make no mistake. We are at war with Russia. Not with guns, but with economics, and only WE can save ourselves. Until now, we have only been focused on our individual successes as a company and now, we must rethink together and refocus on our collaborative survival. It needs to start today. Here’s how:

1. Regulate Flaring. Never let a crisis go to waste and we can all agree, flaring is irresponsible and reflective of bad planning. Great news. As I wrote yesterday, the market is probably 7.5 mmbo/d out of balance. That means that 7.5 mmbo/d around the world will need to be shut in to avoid oil going to <$20/bbl. The U.S. needs to be a part of this and the first wells that should be shut in are the ones that flare. Added to that, the RRC, NDIC, OCD need to regulate flaring immediately. It will have the benefit of being environmentally logical while rebalancing the market. Moreover, most flared wells are new wells (pre infrastructure) so the risk of them not coming back at 100% is very low. Most importantly, it will reward companies that have been good stewards of the environment and resource to date, and punish those that weren’t. And we promote it hard.
   
2. Restructure compensation. Cash costs must be reduced to be able to survive and though many will hate that I’m saying this, the board, management and employees in all sectors (upstream, midstream, OFS) must have salaries reduced, starting at the top with the CEO. It is the only way to preserve cash, and a reduction in salary for everyone prevents laying people off and losing their talent permanently. Benefits must be kept for all employees It is far better to keep everyone at reduced rates than lose some from the industry forever.
   
3. Deeper capital cuts. Parsley and Diamondback both made announcements Monday about reducing activity but it is not nearly enough. Every company needs to shrink to as close as possible to 0 capital. For 12 years, we have used debt and subsidies from OPEC+ to grow U.S. production to 12.8 mmbo/d. That was unsustainable at the best of times, and downright irresponsible today. U.S. production must hit 9 mmbo/d (1 year of decline, and 3.8 mmbo/d off the world supply) and plateau there for the future. (The outrageous side benefit that may have gone unnoticed Monday is this decline will impact 12-15 bcf/d of associated gas and actually HELP Appalachia and Haynesville natural gas companies who need less supply to get prices back to $2.50/mcf).
   
4. Companies must merge. Here’s the good news. You were always going to do 100% equity deals. So if your stock used to be $60 and now is $20, and your target used to be $30 and now is $10, it’s the same number of shares and doesn’t change the math. Companies need scale to survive. Merge or die.
   

I believe if every company aggressively reduces (and announces) activity and production, the Saudis and Russians will cut in 3 weeks, but only if they can be absolutely assured that U.S. companies will shrink 3+ mmbo/d in 2020. We have until April 1st (when the OPEC+ deal expires) before the Saudis and Russians will have the opportunity to follow through. Posturing or not – the threat alone wiped 50% off E&P company values in a day.

Bottom line, the world can’t absorb more oil production, especially as the coronavirus reaction is shutting down country after country. Even a 3rd grader knows that growing oil 5-10% per year into a world where demand growth is 1% per year (AT BEST) is poor business model and what’s worse, if we had stopped growing a year ago, we wouldn’t have been punished on Friday.

It’s time to responsibly rethink our business practices. I’m afraid We can’t afford failure.