How Oil and Gas Workers Can Protect Finances Amidst COVID-19
Just three months in, 2020 is proving a very challenging year. COVID-19 is changing our daily lives here in the US, and throughout the world. But for those working in the oil and gas industry during the Coronavirus outbreak, the news of a potential global pandemic was exacerbated by the start of an oil war between Saudi Arabia and Russia.
The price war between the Saudi’s and Russia, coupled with demand shock from COVID-19, has sent oil prices diving. At the time of publishing this, WTI oil prices stand at $23.38 a barrel. Abhi Rajendran, director of research at Energy Intelligence, told CNBC that “Oil could easily be in the teens at the bottom. Could even be low teens at the lowest.”
Just to illustrate the pressure the Super Majors are under, the stock price of Chevron lost 32% of its value from February 12th through to March 16th. And for oil field service companies, the route is even worse. Baker Hughes stock has lost over 55% of its share price since the start of 2020. For those in the oil & gas industry during the Coronavirus outbreak, it’s important to take steps to prepare your finances for a prolonged industry downturn.
Oil Busts of the Past
To help give some additional perspective, let’s take a look at two past oil busts in preparation for another one this year. In times of great uncertainty such as this, there is a lot to be said from looking to the past to help plan for the future.
Back in 1985 here in Houston, Texas life was good. Everyone seemed to be rolling in cash. The 1973 Oil Embargo set off a boom time for the industry. Exxon profits were up by 67% according to the New York Times.
The 1979 Iranian Revolution increased the price of oil, and earnings soared higher. Texaco’s earnings were up 211% for the third quarter of that year. The rest of the country was hurting, but Texas (and Houston) were thriving. This was the era of big hair and big cars. John Travolta was the Midnight Cowboy and the TV show “Dallas” was the talk of the country. Everyone wanted to be a Texan. Times were good.
Things abruptly changed in 1986. Oil peaked at an inflation adjusted price of $117.30 in April of 1980, and by 1985 stood at an annual average of $64.56. By 1986, that price had dropped to $33.97. The rest of America rejoiced. But Texas was under extreme duress.
According to Robert Schaeffer in his book “Understanding Globalization: The Social Consequences of Political, Economic, and Environmental Change,” the value of all commercial property in Houston was cut in half by 1989. My father lost his job at Hydrill as COO of Latin American Operations in 1986. My mother kept us afloat until my father could find another job. He never returned to the oil industry, along with many others.
During that time, 225,000 jobs (or 1 in 8) were lost in Houston. The unemployment rate soared to 9%. More than 200,000 homes stood vacant. It took years for the economy to recover. The nation’s rig count fell from a peak of more than 4,500 in 1981, to a low of 663 in 1986. The industry was unprepared.
The next big shock to the oil industry came in 2015. The average annual inflation adjusted price of oil stood at $93.24 in 2014. In 2015, that price went down to $45.55. By 2016, that price was down to $39.02.
Dr. Bill Gilmer, former Chief Houston Economist for the Federal Reserve of Houston, observed that between 2014-2016, Houston had lost over 74,200 oil-related jobs. The rig count peaked at 1,920 in the US in Dec. 2014, and dropped all the way down to 403 by May of 2016. It was a terrible time to be connected to upstream operations.
The Double Whammy of COVID-19 and Low Oil Prices
So how does all this help those working in the oil and gas industry during the Coronavirus outbreak? Well, the history of the oil and gas industry is one of boom and bust. Learning how to face these challenges for financial surety will give you the best chance of riding out the current low until the next inevitable high sweeps back through.
Sure, things are much different now than they were in 1986. The industry is leaner, meaner, better capitalized, and operates with greater efficiency. In short, the industry is better able to deal with a price shock than it was in 1986. So how can you prepare for the current bust? Here are some tips on what you should be doing right now to prepare your finances.
10 Ways to Prepare for Low Oil Prices During the Coronavirus Outbreak
01. Cut Spending
Just like oil companies need to get lean during times of low prices, so should you. Create a budget, set spending targets, and begin to cut out some of the excess in your spending.
02. Optimize Cash Flow
Just like in business, cash flow is everything. If more goes out than comes in, then when a shock hits (like furlough or layoff) your financial house will be in distress. Prioritize savings over spending.
Prepare for the lean times. Shore up your emergency fund. In normal times, you could get away with 3 months of basic expenses saved up. But these are extraordinary times, so you should have 6 months of basic expenses saved up. The easiest way to start is to speak to your HR department and set up an automatic deduction from your paycheck that is deposited directly into your emergency fund. That way, the money is out of sight out of mind.
03. Pay Down High Interest Debt
If you have high interest debt (such as credit card debt) prioritize that after you shore up your emergency fund. Your typical credit card is charging 21% interest. Kill that first before moving on to number 4.
04. Increase 401(k) Contributions
If you have positive cash flow at the end of the month and your emergency fund contains 6 months of basic expenses, go ahead and see if you can increase your retirement contributions. A bear market (defined as a drop in the stock market of 20% or more) occurs once every 6 years. We have not had one since the 2007-2009 downturn.
This is the perfect time to set more money aside for retirement by buying into the market at a deep discount. You will profit handsomely in the long run when the market eventually recovers. If you have the opportunity to buy company stock in your retirement plan, go ahead and allocate 10% to this, but only after you have researched your company’s balance sheet. If your employer is in a cash crunch and has a lot of debt on the books, think twice.
I normally recommend 5% of your contributions go to purchase of company stock (that way you are not over concentrated in your employer – remember Enron?). But since prices are so depressed, it is ok to look to increase that to 10% to take advantage of this.
05. Investigate a Severance Package
No one ever plans to get laid off. But some companies in the oil & gas industry during the Coronavirus outbreak will offer you a severance package. Find out what your company’s package looks like. And create a plan for that cash before the layoff happens. If you are laid off, your stress levels will be high, and it will be tough to make appropriate decisions with that package while under duress.
06. Voluntary Retirement Packages
You may be at an age where your company offers to give you a voluntary retirement package. Consider whether refusing the offer could lead to being laid off with a different, and perhaps inferior, package. Some incentives may be negotiable, so plan on having that conversation with your employer. And make sure you revisit your financial plan to make sure that accepting the offer is in your best interest, not the company’s.
07. Hold onto Stock Incentive Awards
Most companies pay out bonuses and stock incentive awards late February or early March. If you were awarded stock incentive awards then, the value of those awards has probably declined significantly. Resist the urge to sell. By doing so, you will be selling at a step loss, and will miss out on the upside when the industry eventually recovers.
08. Increase Purchase of Company Stock in Employee Stock Purchase Program
If your company has one, investigate whether it makes sense to purchase shares through your employers ESPP. This program allows for an upto 15% discount on shares purchased through the program.
Make sure your emergency fund is fully funded and that you are maxing out your 401(k) first. If so, then make some purchases and be sure to hold onto them for the long term (at least 1 year from date of purchase and two years from first day of offering period).
If you sell before then, you could owe income taxes on the market price (discounted price) on the date of purchase and the actual share price on date of sale. If the stock went down, you could even owe tax on the difference between the actual share price and the market price when you purchased, accelerating your loss.
09. “Frack” Your Network
Fracking involves pumping liquid at high pressure into subterranean rock to extract oil and gas. Making sure that you are keeping in contact with your network in and outside of your company, especially during anxiety inducing times like these, can help you mine for opportunities should a voluntary or involuntary separation occur.
The beauty of recessions is that it gives us the willpower to reinvent ourselves and do the things we always dreamed of but were unwilling to because of risk to a cushy paycheck. That one colleague of yours may be thinking of starting his own business and needs a partner with an idea you have. Or another professional contact jumps to a competitor and mentions you should be on their radar.
Your network may contain a wealth of opportunities, but only if you make the effort to frack it.
10. Take Care of Your Loved Ones
In times of uncertainty you want to be sure you are taking care of the ones you love most. Especially during extraordinary times. Let your spouse or partner know that you love them, and that everything will be ok. Tell your children what is happening in the best way possible, and let them know no matter what, this will get better.
During times of uncertainty, love can get us through a lot. And that positive attitude can help put your finances into a deeper perspective, by helping you understand what is truly important and what is not.
Moving Forward Amidst Uncertainty
For those working in the oil and gas industry during the Coronavirus outbreak, there are also additional ways to make sure you are ready for a sustained period of low oil prices that will have you come out the other side ahead. But putting all of these steps into a concise actionable plan can be daunting.
That is where having a professional on your team to guide you through all of this and help you implement an actionable plan is key. If you feel that the additional support and expertise of a CERTIFIED FINANCIAL PLANNER™ professional could be what you and your family need to help you through these changing times, then I’d love to chat. We are ALL in this together.