The big story for the oil & gas industry in 2014 has been the rapid fall in benchmark oil prices.
In the last six months alone, the price of Brent Crude has almost halved (46%) from over $115 a barrel to around $60; lows not seen since the early months of the financial crisis in 2009.
As we head into 2015, two things are abundantly clear: the industry will need to adapt to this new level of volatility; and for the 440,000 people employed in the UK’s oil and gas industry, these are uncertain times.
There is little expectation of a rapid rebound, such as in 2009, and many commentators are assuming that prices could remain low for much of 2015.
Against this backdrop, PwC’s oil and gas deals team have set out their top five predictions for the year ahead.
1. Reactive public company equity valuations
Communicating value in the complex world of oil & gas has always been a challenge. The interaction between today’s traded oil price and the key drivers of shareholder value in what is a long term industry, such as forward price curves, production profiles, economic viability of reserves, production sharing, production costs and hedging makes this a complex equation. UK equities in the sector as a whole are down 18% since the start of the oil price decline, with much higher drops for companies in the Equipment & Services (30%) and Exploration & Production (42%) segments.
There is little meaningful consensus on when and how far the oil price will come back up. Analysts’ long term views are being moderated down almost on a weekly basis, illustrating how little real visibility there is.
As a result, we anticipate more distress sales and opportunistic public bids for companies with good underlying assets but the wrong financing structure. We may even see the first hostile take over in the Oil & Gas sector in living memory.
2. Cash constraints
We expect the oil and gas industry in its current form to be increasingly cash-constrained throughout FY15.
New debt will come at a cost, and existing debt will come under increased scrutiny and increased risk of covenant breach. Reserve-Based Lending (RBL) in particular will be more expensive and less accessible, as banks adjust their base oil price assumptions down for lending. We expect banks to provide some support to the industry as this is a global – not just UK – problem. Nevertheless, even good companies may see some distress if they are in the wrong place in the capital expenditure cycle....MOREAlso at PwC:
Oil price decline: the global and UK economic picture from PwC's economists
