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Oil Prices at Record Lows, Production Still High: Answers in Assets

Liquidity Services- March 24, 2015

Each industry has a different approach to corporate asset management. Some sectors require complete management and visibility in the supply chain, while other markets rely on reverse logistics to keep their revenue streams steady. An industry's current landscape is often easy to glean from asset management tactics: High points lend themselves to asset retention and valuation while low valleys contribute to asset disposition rates.

The oil industry is currently one of those markets. It's going through turbulent motions, making it ripe for asset disposition as prices and demand decrease. However, the industry is also experiencing a continued rise in production and competition, meaning that these numbers will fall quickly to catch up with the cost of oil.

The current conditions
According to Reuters, oil supplies and production levels have been rising and are still growing, passing record high numbers. This is normally considered good news, but right now, oil producers are not pleased as more production means equipment is tied up when it's not required. For the past seven months, the market has been at milestone low point. The Wall Street Journal cited the International Monetary Fund's (IMF) 2011 estimates which showed that oil demand would decrease by about 0.2 percent every year. According to the source, if trends continue that rate will stay around 0.7 percent. If demand is diminishing, it makes sense to immediately scale back on production. The supply is not necessary, and selling surplus assets could contribute greatly to the 2015 budget.

Skies look grey in regard to the oil industry's current landscape.

Skies look grey in regard to the oil industry's current landscape.

On top of the demand concerns there are also worries about price. The Wall Street Journal reported that the IMF predicted a 10 percent decrease in the cost of oil, but in reality, the prices have declined by 50 percent compared to 2011. The source stated that oil prices will stay low, resulting in a lack of profits and decreased production, and it could remain that way for a long period of time due to a changed mindset from consumers. Industry leaders need to turn to their unused assets to recoup the losses caused by lower price points, bringing operational revenue levels back to normal.

Turning to unused assets
The best solution to the potential long-term industry problems lies in surplus asset disposition. The market conditions build the case for revenue recovery via the sale of unused machinery and equipment. Because oil prices remain low along with the consumer demand for the product, businesses in the sector will need to mitigate the impact of lower earnings.

In addition, production must slow down in the coming months, leaving equipment idle. The cost to store and maintain unused assets can be high. Now is the right time for organizations to evaluate whether or not to hold on to these assets until production again increases. As margins become tighter, cost efficiency will be a requirement, and revenue streams still need to flow. The key is asset disposition.

The secondary market for off-shore drilling equipment is different from other sectors of the industry, and it takes a trusted asset management partner to navigate those complexities.

The secondary market for off-shore drilling equipment is different from other sectors of the industry, and it takes a trusted asset management partner to navigate those complexities.

Filling in for production woes
The oil industry is also facing challenges in regard to equipment manufacturing, proposing a unique opportunity for businesses in the sector and secondary market buyers. According to Seeking Alpha, the oil and gas manufacturers are expected to "underperform meaningfully" in 2015. Additionally, the local news source Tulsa World reported that one Tulsa-based driller is letting go of 2,000 employees, while a remote location for a Denver-based energy firm is closing, leaving 100 people out of work.

As manufacturers close, oil producers and other organizations are left without replacement parts or supplies. This only serves to stress the importance of selling old equipment sooner rather than later, especially considering that the secondary market will quickly become a hotbed of activity in the sector. Selling assets in a time-efficient manner also helps businesses receive a maximum return on investment.

Work with partners
The only factor preventing corporations in the oil industry from disposing of old, unused or surplus equipment and machinery is their lack of a partnership with a trusted asset management organization. By partnering with an experienced firm, oil producers can ensure that their capital assets are sold in a timely fashion for the best possible ROI. Businesses will need to seek out asset management partners that offer multiple marketplaces to sell surplus equipment, as the each global economy will have separate demands and pricing expectations.

Furthermore, these partners can provide cloud-based software to promote better asset management across the company. In the oil industry's case, many businesses could use those tools to successfully redeploy equipment and machinery as production levels wax and wane at certain facilities or geographical locations. Regardless of the asset management strategy, those in the oil sector will still need to work with trusted partners to ensure goals are met with least resistance.

Liquidity Services

Liquidity Services (NASDAQ: LQDT) employs innovative e-commerce marketplace solutions to manage, value, and sell inventory and equipment for business and government clients. We operate a network of leading e-commerce marketplaces that enable buyers and sellers to transact in an efficient, automated environment offering over 500 product categories. Our superior service, unmatched scale, and ability to deliver results enable us to forge trusted, long-term relationships with over 10,000 clients worldwide. With nearly $7 billion in completed transactions, and 3 million buyers in almost 200 countries and territories, we are the proven leader in delivering smart commerce solutions. Visit us at LiquidityServices.com.