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  • Steven Lerner

The Post-Covid Aftermarket … How Does This Mess End?

WTF, WTI?... and How About Parts and Service Futures?

Virus Economics, Oil Market Structural Collapse and the Insistent Low-Carbon Transition together mark the initial appearance of oil’s ‘Triple Black Swan.’

Last week, oil prices crashed on simultaneous supply and demand shocks, forcing industry experts to turn to mythology (“The pillars of Hercules crashed together.”) and even polemology, the study of war. “Armageddon,” one Barron’s analyst warned. At least the price (at that time) was a positive number!

Everyone asked over the weekend- How low will oil prices go?

The key American oil benchmark, West Texas Intermediate (WTI), fell by more than 80% on Monday as global oil markets continued to grapple with a pandemic-driven worldwide collapse in demand. There is simply no place to store the oil that is being pumped.

At the start of 2020, a barrel of WTI cost around $60…during Tuesday’s futures trading, May contracts traded as low as -$40.65… yes, minus $40.65…the lowest price the WTI futures market has ever seen. Traders needing to settle this week would essentially pay that much not to have to take physical possession of the contracted oil purchase.

Just for fun, I looked at real ‘future futures’… According to the CME Index, the delivery price for a barrel of WTI won’t reach $50+ until 2028! Gas is headed for $1 per gallon, but vehicle miles driven (VMD) is off nearly 50% (car and truck) since the beginning of the year. Car sales suck!

Our initial report on the outlook of the ‘Dirty Thirty’ (now nearly ‘Filthy Forty’) emphasized two points regarding OIL and the industrial distribution and vehicle aftermarkets.

Disaster was already upon anyone with oil (especially shale and fracking) support operations, mainly in Eagle Ford, Permian, Devonian, Bakken and Marcellus (approx. 10 states). Support includes construction equipment, welding, lifting ropes, conveyors, hydraulics/pneumatics, sand /water hauling and safety and maintenance supplies.

The emergence of new technologies and vehicles (light or heavy) will NOT be slowed substantially during the recovery. Daimler Truck AG and Volvo Group announced Tuesday they have signed an agreement to establish a new joint venture charged with the development, production and commercialization of fuel cell systems for heavy-duty vehicles.

Remember, Wednesday is the 50th Anniversary of EARTH DAY. The confluence of politics, science and deeply popular environmental concern will ultimately decide the fate of the internal combustion engine… probably sooner than most had anticipated.

America's oil and natural gas industry supports 10.3 million US jobs and represents nearly 8 percent of our Gross Domestic Product… as well as nearly 10% of recent GDP growth.

Recent production cuts won't stop the oil industry's fall… and the market disruptions will resonate for years. Oil prices rose after news of a production cut agreement between the world's largest producers. This completely theatric move will not be enough to form a price foundation nor to change the commodity’s bleak trajectory.

Crude futures jumped about 5% (to near $25 a barrel) for WTI crude after the OPEC+ alliance agreed to a 10 million barrels-per-day production cut. This presumably ended a price war between Saudi Arabia and Russia. What do we see now? COVID-19 outbreak has slammed demand such that a cut of 25 million to 40 million barrels per day would be needed to offset the losses in the 100 million barrel-per-day market.

A tidal wave of bankruptcies, defaults and closures of U.S. oil and gas companies (drillers, transport, refinery and oil field services and supplies) is likely in the near term. Forty percent of oil and natural gas producers face insolvency within the year if crude prices remain near $30 a barrel. This disaster will continue to weigh on bond and equity markets as well as the broader economy.

Energy companies are the biggest issuers of junk bonds, accounting for more than 11% of the U.S. high yield market. Even though the Fed has moved into purchases of some high yield bonds, much of the energy sector is highly levered and unlikely to meet standards for rescue from the central bank's ever-expanding world of asset purchases. Last week, Goldman Sachs analysts expected WTI crude prices to fall to $20 a barrel as downside risks overwhelm the near-term boost in sentiment.

Longer term, are oil and gas companies ready for the low-carbon transition?

The demand will become even clearer as citizens recognize the improvement in air and water quality due to the shutdown… from Delhi to Detroit. Oil and gas account for over half of the global greenhouse gas emissions associated with energy consumption.

The top ‘energy’ (oil & gas) companies have invested $22 billion in alternative energies since 2017. However, low-carbon spend for the sector as a whole is small and accounts for only 1.3% of total 2019 CAPEX. There is increasing investor pressure - votes for climate shareholder resolutions more than doubled from 2014 to 2018.

Affecting Canada and the Bakken field, five big companies have divested from oil sands assets completely. Fifteen leaders have set emissions reduction targets. The sector has launched a number of initiatives aimed at cutting routine flaring and reducing methane emissions

Bankruptcies are inevitable… The industry was forced to restructure after the 2014-2016 oil price crash, which saw Brent crude fall to $28 a barrel from $118… watch what happens now!

“Bankers will be unwilling to refinance at this time, given how much riskier the sector has become with geopolitical factors well beyond their control,” according to Kathy Hipple, an analyst at the Institute for Energy Economics and Financial Analysis. “Some frackers have, indeed, hedged and have become more efficient at production—but remember, they’ve been cash flow-negative, in aggregate, for a decade, and that was with higher oil prices and demand.”

…And as importantly… now, no one wants the stuff.

Oil is one huge disruption…

What about traditional Parts and Service?

According to my buddy Bruce Merrifield, cataclysmic changes in future markets may present way more aftermarket opportunities than pain. …but only with the right analytical and digital strategies to bridge the changes above… and win in the Cloud eCommerce world of 2023.

What Visions of Accelerating, Reinforcing Trends are Suggested by ’23?

Armies of ‘all-night at Amazon are innovating ways to grow B2B revenues (including fees for service from resellers) by giving millennial B2B buyers what they want:

Limited human interaction, digital info delivery, on-demand engineering 24/7/365 answers, prices, availability, ordering, half-day or less delivery, tracking, electronic billing/collection.

Biggest B2B brands must increase digital engagement measures for end-users or lose to lesser brands and clones that are on Amazon. How must distributor-channel models then change?

Recognize that digital disrupters offer lower prices on distributors’ most net-profitable SKUs, that 5G bandwidth will enable expanded B2B video-education use and that the selling model of reps calling on a regular basis (with the cost built into the product) will be replaced by interactive, e-selling support.

Bruce: Distributors and close supplier partners MUST turn to analytics.

Utilizing shared data and analytic constructs, partners must distill the greatest total-procurement value from their most net-profitable customers. “How can our joint solution create this value in ways that Amazon Business and innovative competitors (like Home Depot) cannot?”

Create a ‘mini channel’ digital transformation. Model innovations at the selling, business and channel levels… Consider that all services may be unbundled-for-fees. Create custom solutions for key accounts.

A new, digital, customer-centric paradigm is here. Both Bruce and all of the Wade partners are ready to work with your teams to show how this analytics approach will help legitimately downsize your costs… while creating unique value for your best customers and suppliers.

Bill Wade - April 21, 2020

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