March 23, 2020
How Oil Prices and the Coronavirus are Likely to Impact Your Environmental Services Company
Uncertainty in the Marketplace
Like the rest of the world, environmental service companies (ESCs) are feeling the impact of uncertainty on business models and revenue projections. For most people, this uncertainty is tied to worldwide efforts to “flatten the curve” of the novel coronavirus. While Covid-19 related social distancing certainly impacts the fortunes of all business enterprises, ESCs are likely more concerned by other economic factors. Unlike many who can work from home, many ESCs and the generators who use their services continue to work to meet regional waste disposal needs. In any event, most recognize that social distancing and remote work are temporary disturbances that will fade in time.
Of much greater impact for waste brokers is the precipitous drop in oil prices that have occurred since Saudi Arabia and Russia began to engage in a price war with global implications. This price war, coupled with falling demand as a result of coronavirus disruptions, is likely to have far-reaching implications for the environmental services industry.
Concerned ESCs have several questions:
- How should waste brokers think about the impact of falling oil prices on waste disposal volumes?
- Is the coronavirus pandemic likely to make it worse?
- How long before waste volumes begin to fall?
- Is it possible to remove some uncertainty so that a proactive response can be made?
WASTELINQ has experience in answering these questions and can provide some insights.
The Effective Environmental Experience
On October 17, 2014, the principals of WASTELINQ were approached by a major publicly traded company about their interest in acquiring the large regional environmental services company that was the predecessor of WASTELINQ. With headquarters in Texas and operations in Texas, Oklahoma, and Louisiana, this ESC had grown from a base of $500,000 in annual revenues to nearly $50,000,000 in annual revenues over the course of almost twelve years. In October 2014, the price of West Texas Intermediate crude oil was $82.47 per barrel.
In Texas, Oil Drives the Market
Like many companies operating in Texas, the ESC’s revenue had some relationship to oil prices. Higher oil prices mean greater waste volumes, and this ESC had certainly benefited from high oil prices in 2013 and 2014. In fact, for most of 2014 oil prices were in triple digits.
But now, oil prices were dropping. Oil was already down 18% from the previous year and looked to continue its decline. In fact, oil would eventually drop to $43 per barrel before rebounding slightly. With a major transaction looming, the ESC needed to quantify the impact of falling oil prices on projected revenues. What did falling oil prices mean to the environmental services space?
Correlating Oil Prices to Waste Disposal Revenue
This was the genesis of WASTELINQ’s oil price market model. The model was used to predict waste disposal volumes and revenues based upon current and projected oil prices. The model revealed several interesting insights.
- Oil prices are not the only impact on waste disposal revenue. While oil prices are the single largest factor affecting waste volumes in Texas, other variables have a meaningful impact. The second most compelling variable revealed by WASTELINQ’s experience is unemployment. Even in the midst of falling oil prices, steady employment rates buttress the production of waste volumes.
- The impact of falling oil prices is not immediate. Under normal circumstances, WASTELINQ has found that there is a 3 to 6-month lag between oil prices and waste volumes. This means that the waste volumes generated today are predicted by the price of oil in the fourth quarter of last year. Today’s oil prices will likely have their largest impact at the end of second quarter and the beginning of third quarter.
- The same is true of unemployment. In general, there is a 2 to 3-month lag between changes in the unemployment rate and changes in waste volume.
- Don’t underestimate the waste generated by project work. One reason that waste volumes lag oil prices is that shutting down production generally produces project work that enables waste volumes to persist for a period following the shutdown.
Implications for ESCs
Given these insights, ESCs can more confidently address these turbulent conditions. While oil prices are falling, today’s waste volumes are predicated on the oil prices that prevailed over the last 6 months. Oil averaged $56 per barrel during that period. In addition, employment remains strong, with unemployment averaging 3.4% in Texas over the last several months. Both data points suggest that the prudent broker has time to respond.
Even though it will take time for the impact of lower oil prices to filter through the market, there will still be a noticeable impact relative to planned revenues as we approach the second half of the year. In truth, it is likely that this iteration of falling oil prices will begin to be felt in the marketplace sooner than historical events suggest. Given falling demand driven by a worldwide shutdown of many industries, it is likely that the lag between falling prices and diminished waste volume will be on the order of 90 days instead of 180. WASTELINQ’s model predicts that waste disposal volumes will fall between 20% and 25% versus previous expectations in the fourth quarter of the year.
The ESCs who are positioned to weather that storm will be those that approach the market calmly and with an eye towards controlling overhead spend. One way to control overhead spend is to review critically all non-customer facing operations. Such operations might include technical profiling, order entry and invoicing, logistics management, procurement, and accounting.
Leverage WASTELINQ’s Experience
One option for controlling overhead expense is leveraging WASTELINQ’s Network suite of services. With deep experience in the ESC space, experience that includes navigating changes in oil pricing, WASTELINQ stands ready to offer its expertise in helping your environmental service company to survive and thrive through the current market turmoil.