By Scott Hamilton
The last two years have been a roller coaster for everyone, but even more so for employees in the oil and gas industry. With record layoffs in 2020 (1) and geopolitical instability in 2022, (2) it can be tough for employees to manage their finances with so much uncertainty in this industry. Though oil prices have rebounded significantly since the crash in 2020, there are still several unique obstacles facing oil and gas employees. Here are the top 3 financial challenges oil and gas employees face and what you can do to overcome them.
Table of Contents
Too Much Risk in an Overly Concentrated Position
It is very common for employees in the oil and gas industry to own large amounts of company stock either through equity compensation or buying it outright. If the company stock makes up more than 10% of the entire portfolio, the position is considered concentrated and can expose employees to unnecessary risk. This is because:
- A highly concentrated portfolio is subject to more volatility since the value of the position is at the mercy of just one asset.
- The more the company stock fluctuates, the more the total portfolio fluctuates too.
- The portfolio is over-exposed to company-specific risks, like bankruptcy or increased regulation.
Not only does this company pay your salary, but they also make up a large portion of your investments. What would happen to your finances if they suddenly went under? The truth is, no matter how much you believe in your company, bad things can still happen and you don’t want to be overly concentrated if they do.
Mismanaging asset allocation is one of the most expensive mistakes you can make. I like to say that concentration is a great way to grow wealth, but diversification is a great way to keep wealth. By properly diversifying your portfolio, you can mitigate the inherent risks associated with owning company stock and reduce overall volatility.
Changing Investment Landscape
On a global level, the investment landscape around the oil and gas industry is changing rapidly. There has been a major movement toward ESG investing, which seeks to align investors’ values with the companies and products they invest in.
- ESG has had a significant impact on oil and gas as more and more investors shy away from the industry. (3)
- Most of this has stemmed from the climate change movement, which has long targeted oil and gas as the primary cause of climate change.
- From lower PE ratios, fewer loans, ESG impacts, and proxy battles for board sets, there are many factors affecting the long-term investment outlook of this industry.
Because of this, oil and gas employees are exposed to even more risk by holding a concentrated investment position since there is so much uncertainty around what the future holds. Not only that, but there may even be career risk to think about if the industry were to suffer a major contraction.
Though it’s unlikely for there to be any huge disruptions to the industry, it is worth strengthening your financial plan to make sure you’re properly prepared just in case.
Cyclical Nature of the Industry
Another challenge facing oil and gas employees is the cyclical nature of the industry. There are times when the industry is booming and periods when the industry is struggling.
- When the industry is booming, oil and gas prices are typically high, which can lead to increased profits for companies in the industry and better wages and benefits for employees.
- When the industry is struggling, oil and gas prices are typically low, leading to decreased profits for companies.
- The cyclical nature of the industry can make it difficult for employees to predict when their jobs and income level will be secure and when they may need to find new employment.
- Coupled with the historical levels of inflation, many employees may feel priced out of a comfortable standard of living.
To combat this issue, planning ahead is key. If you are an oil and gas employee with variable income, it’s important to track your expenses carefully and create a budget. This can help you determine areas of spending where you can cut back when income is lower, and how much you can afford to save or invest when income is higher.
Don’t Let Current Market Conditions Dictate Your Retirement
As an employee in the oil and gas industry, you face unique financial challenges as a result of current market conditions. While many companies offer their workers generous retirement benefits, the current volatility of the oil market could place those benefits in jeopardy.
In order to provide for a comfortable retirement, it’s wise to take action now. Schedule a complimentary get-acquainted meeting online or reach us at 512-261-0808 or scott@hamiltonfinancialplanning.com.
About Scott
Scott Hamilton is the founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals.
He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.
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(2) https://www.accenture.com/us-en/insights/energy/ukraine-oil-gas
(3) https://www.12eleven.com/news/the-importance-of-esg-in-the-oil-and-gas-industry?hsLang=en#b
