ANALYSIS
CALGARY ? An offer between top oil producers Saudi Arabia and Russia to freeze oil output at current levels may signal that oil prices have recently hit bottom – but that doesn’t mean no more pain for that oil and gas sector.
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Absent a clear, crisp price recovery, gas and oil exploration and production companies are facing more serious stress in 2016, with many now on the brink of bankruptcy, according to a Deloitte study published Tuesday.
“Even after 18 months of falling oil prices, pessimism has not bottomed in the oil and gas industry,” the accounting and consulting firm said within the study. “Access to capital markets, bankers’ support, and derivatives protection, which helped smooth a normally rocky road for the industry in 2015, are fast waning.”
With a capital crunch looming and heightened income volatility, 2016 is a period of tough financial selections for the industry, the study says.
Perhaps the most alarming trend is the fact that out of 175 global exploration and production companies contained in the study with a combined US$150-billion in debt, 50 have reached a “precarious” situation and “the possibility of these businesses slipping into bankruptcy has elevated levels of 2016, unless oil prices recover sharply, a large part of the debts are changed into equity, or big investors infuse liquidity,” Deloitte warns.
The vast majority – 160 companies – in the group will also be dangerously cash-flow constrained.
So far, the group (which excludes integrated and national oil companies) has utilized a variety of strategies to cope with the downturn, that has gone from bad to worse and it has lasted far more than many expected: bankruptcy, increasing borrowing, seizing opportunities, or correcting balance sheets and optimizing operations.
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In the U.S. alone, 35 companies declared bankruptcy protection between July 1, 2014, and Dec. 31, 2015. The amount is lower than during the 2008/2009 global financial downturn, when 62 companies filed for bankruptcy. This time, companies had greater access to capital, hedges at favourable prices, cost discipline and lower spending, the analysis found.
Some companies even acquired assets to go in new plays, bet on future growth in order to increase scale. Others raised cash through capital spending cuts, asset sales, equity issuance and lower dividends.
But using the downturn dragging on, lenders are tightening the purse strings and hedges are expiring.
Going into 2016, U.S. companies with a speculative-grade rating and people rated ‘B’ or lower by Standard & Poor’s have 28 percent and 37 per cent of their 2016 oil production hedged, respectively, versus 51 per cent and 62 per cent, in 2015.
Even after 1 . 5 years of falling oil prices, pessimism has not bottomed out in the gas and oil industry.
“Lower hedged volumes, and also the pressure from banks to have predictable cash flows, will most likely lead to a complex choice – to hedge or otherwise to hedge just in case there is a marginal recovery in prices. A wrong bet in either case could risk the survival of the company,” Deloitte said.
With few levers left to drag this year, companies will have to further reduce dividends and share buybacks, plus further cut costs, Deloitte concluded.
The continuation of spending cuts will likely possess a substantial and long-lasting effect on future supplies and open new chapters in the geopolitics of oil, Deloitte says. The potential risks include slowing the conversion of resources to reserves and reducing spending to maintain aging fields and facilities.
Despite the most obvious pain – made worse in Canada by discounts on already-low oil prices due to insufficient export pipelines – there is heightened worry about a lack of policy response or perhaps of public sympathy.
The Canadian Association of Oilwell Drilling Contractors is launching a campaign Wednesday to restore “respect,” the audience said.
“Our industry is being hit hard. 100,000 oilfield sector workers are unemployed,” the association said. “A large number of businesses are in trouble. CAODC’s Oil Respect campaign will defend the industry within the context of their: national and international image; economic benefits; and global environmental impact. We will encourage Canada’s leaders to battle for that Canadian energy industry.”
ccattaneo@nationalpost.com
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