Hotels are Just Like Oil Wells...Well Almost
My degree in Hotel and Restaurant Management is once again helping me build TerraFina Energy. No, I have not decided to return to my first career in this soft market, but I have found that explaining how the hotel industry works has help those not involved in the energy sector make sense of the headlines.
For this example, I am classifying the hotel industry into only four segments, the convention hotels with 1,000+ guest rooms, followed by large hotels with up to 600-rooms. A mid-market property would contain between 150 and 300 rooms and finally the budget or limited service hotels are comprised of properties with fewer than 150 rooms.
Let’s examine the hospitality industry during one of their economic downturns. Following 911, air travel came to a sudden standstill and severely affected both the business and leisure travel markets. While all segments of the market were hurt, the large convention hotels had the greatest exposure. They had large facilities and staffs that was difficult to support financially. Hotels with the least exposure were the limited service properties. By design, they offer fewer guest services and as such carried smaller payrolls.
The oilfield is no different. The convention hotel scenario is comparable to the shale plays, while the limited service hotels are similar to the stripper well segment of the oilfield. Where we do differ is the price we receive for our goods. Hotel room rates are very competitive which is evident by the numerous websites designed to aid travels in finding the best buy. In the oil patch, the current commodity price for a particular grade of crude sets the sales price and there is little variation from location to location. It does not matter if the production is from a shale play (a convention hotel) or a stripper well (a budget property).
While we would all love to have $100 barrel oil, that was an anomaly. Since 1946, there have been four booms that propelled oil prices over $60.00 a barrel.
May 1979 to Dec 1985 (a total of 79 months) was a prosperous period with oil peaking in April 1980 at $116.05
November 1990 oil prices jumped to $60.41 and instantly returned below $60
We next crossed the $60 benchmark in October 2004 and that cycles lasted until December 2008
We returned to $60 oil from May 2009 until the recent collapse in December 2014.
These four cycles represent only 198 months where oil prices exceeded $60 a barrel, or 23.9% of the total period reviewed. It is also worth mentioning that these dollars have been adjusted for inflation. As with hotels, those operators in the mid-market have proven they can survive, and in many cases thrive, with oil prices well below $100. That is where I have chosen to position TerraFina Energy. Today, I cannot envision a scenario where we would consider drilling a shale well, but the public perception is that’s what all operators are pursuing.
While hotels will tell you they have a highly perishable commodity as any room not sold today cannot be sold multiple times the follow day to make up for the loss in revenue (ok…with a few exceptions perhaps, but none that would involve our readers I am sure). In the oilfield, we do have the option to reduce our production based on market price.
There is no question the cheapest place to store surplus oil is in the ground. With recent announcements that Congress may finally lift the 43-year-old oil export embargo, and word that OPEC Secretary-General Abdullah al-Badri stated he could see a rise in oil prices in the coming year, 2016 could be our turn around year.
It is early, but I am more than a little excited about the New Year. I wish all my friends in hospitality industry similar returns for 2016.