Low prices provide opportunity

Matthew Jurecky, GlobalData's Head of Oil & Gas Research and Consulting, has stated that:

"Voluntary oil production cuts to support oil prices have been ruled out in favor of a brutal process of natural selection to correct the market. The most efficient producers will be left standing as growth slows and companies cut capital budgets and reduce headcounts. Producers are retrenching, focusing capital on maintaining production levels, repaying debt, and paying dividends. Those with financial obligations greater than cash flows from operations, and especially those that have depended on debt for growth, will become increasingly distressed. These companies will ultimately be forced to either sell assets or seek an outright buyer to avoid bankruptcy.

"The impact of low prices will be felt across the entire value chain. Profit margins for equipment manufacturers and services providers are being squeezed. Producers fighting for survival will try negotiating price cuts or opt out of contracts to prolong production and cash flows. Margins for service companies will fall and those unable to compete and operate profitably will require strategic options. Companies heavily exposed to emerging or speculative production areas counting on future growth are vulnerable, whether pipeline operators or service companies. The more prolonged the period of low oil prices, the more exposed companies will be.

"While efficient operators will survive, those with limited long-term planning will falter and become targets. Companies with uncommitted capital are presented an opportunity to expand market share and non-industry speculators have a strong entry opportunity, particularly financiers and those interested in distressed debt. Strong profits had been fuelling the mergers and acquisitions market, but value awaits patient contrarians now able to buy when the market is at its lowest and confusion reigns.

"Asset values have collapsed and now is the optimal time to acquire. Buyers benefit from asset values appreciating in the long term as prices rise over the years. Companies with strong long-term planning and risk controls will take centre stage. The fruits of planning will be lower debt obligations and cash reserves that support companies through years of low oil prices and also provide for acquisitions, without stressing balance sheets. Looking for options will be those that have found their cash reserves depleted and those that have depended upon debt to fund operations above and beyond cash flow.

“Previous oil price crashes in the 80s, 90s, and 2000s all triggered significant acquisitions, redrawing the landscape and creating stronger and more efficient operators. It would be an opportunity lost should the environment not be exploited, as International Oil Companies (IOCs) are moving into the next decade with fewer greenfield opportunities and increased competition from National Oil Companies (NOCs). NOCs are more technically capable and increasingly taking control of domestic resources. This is resulting in fewer exploration opportunities for IOCs, meaning they will need strategic inorganic opportunities to replace reserves and grow production. IOCs with similar objectives, shared vendor relationships, and complementary asset portfolios would see significant operational synergies from mergers and be more efficient to compete in the post-price crash world.

"Although not without challenges, the merger of Exxon and Mobil created the largest publicly-traded oil company in the world and reached pre-merger levels of employees within five years, but with much expanded operations. Independent producers will also face pressures to consolidate or risk being considered bolt-on opportunities to larger portfolios. Those with heavy debt obligations will find the next year challenging, as the low price environment lasts longer than hedging programs covered for. Pure-play operators with the strongest positions will snap up smaller operators to gain market share. This is especially true in the US shale plays, where there is heavy competition and low barriers to entry have allowed for many smaller operators."

Published on 16/04/2015


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