The “shale-oil” revolution has shaken the world of energy to its core.
Before this, the Petroleum Industry was dominated by National Oil companies like Saudi Aramco and titans companies like Shell, Exxon Mobil and Total, who liked to talk big about multibillion dollar exploration projects and commanded all the attention. Today, analysts instead follow closely the fortunes of the smaller more nimble Shale Oil exploration companies in the United States in order to understand where oil prices are going to.
This is because the Shale Oil producers have emerged as the marginal producers i.e. the producers who can turn on the tap and produce more oil when prices go past a certain threshold as well as turn it off and reduce supply when prices collapse below a certain point. The magical range is $40 to $50 per barrel.
One of the best known Shale Oil producers is a company called Continental Resources Inc based out of Oklahoma. For those who do not already know, Oklahoma is the Oil Capital of the United States as the major oil pipelines cross through Cushing, allowing oil to flow to and from different parts of the United States based on demand and supply factors. Cushing is also one of the largest hubs to store oil and petroleum products.
The interesting thing about Continental Resources is their ability to adapt to the low oil environment. 12 – 18 months ago, when the oil market started to crash, analysts were adamant that the Shale producers could only be profitable when prices were above $70 per barrel. Prices have been below $50 per barrel for more than a year and the Company is still performing surprisingly well. Recently, the company managed to redeem US $600 m of its debt outstanding, one of the best indicators of a company that is operating with sufficient liquidity in what is a difficult time.
More tellingly is that Continental Resources achieved all of this without letting a single of their staff go. During the start of the year when Oil was trading at $25, Continental’s stock reached a multi-year low of $13.50. Usually most CEOs would press the ‘fire’ button as they attempted to cut expenses in order to boost the stock price.
But Continental’s CEO, founder and Owner, Harold Hahm refused to do that, preferring instead to show his loyalty to his staff that worked for him. And his staff repaid the faith showed by relentlessly focussing on reducing costs and improving efficiencies. Based on Continental’s latest quarterly results, they have progressed so much that they have increased the EUR (Estimated Ultimate Recovery) from their average oil well to 1.3 Million Barrels of Oil Equivalent (Boe) and reduced costs through better techniques and resource management.
This allows them to generate significantly high Internal Rates of Return (IRRs), well into the 30 to 50%, even when oil is at $40. Investors have cheered this sending the stock up by almost 400% from its January lows to $51 to $52.
This form of loyalty, innovation and relentless pursuit of cost savings is something more associated with Japanese firms than with an American company. And on the outside, Continental will be more American than most.
This may be difficult for a race-obsessed nation like Malaysia to understand.
In 2016 alone, more than 6,000 employees from GLCs were laid off, with 4,600 from MAS and 1,000 from Petronas. This is perplexing as MAS should have benefited from low jet fuel prices. For Petronas, a national oil company that is among the 7 largest oil companies in the world, the layoffs shocked many people with allegations of discrimination against East Malaysians.
But the question still remains: How come staff in GLCs are made to suffer even circumstances are relatively much better than staff in capitalist American firms? Why is Continental Resources so much better at showing loyalty to staff and then gaining the benefits whereas MAS and Petronas are so quick to cut people off at the worst time.
The reason is culture.
In Continental Resources, they may talk with a thick Texas Accent but when it comes to work, they have shown great passion and drive to win. People know what they are expected to do, and are willing to go the extra mile to do that in order to show the resilience of their Company to thrive even in adverse circumstances.
In a race obsessed country like Malaysia, corporate culture is so toxic with incompetent people occupying high positions. How else can you explain MAS decision to seek a non-Malaysian as CEO? Or how can you explain the billions lost by Petronas in its overseas natural gas investments? Can it be because we promote based on connection, bodeking capability and cronyism? Is there any hope left for the country when the Prime Minister himself said that he values “loyalty” (to himself) more than hard work or intelligence.