One-third of world’s oil companies risk bankruptcy – Deloitte

Deloitte says E&Ps running out of options to battle liquidity crisis as oil prices remain low

A new study from consultancy Deloitte finds that one-third of global oil companies are at high risk of bankruptcy as continued low prices strains corporate finances.

The study, “The crude downturn for exploration & production companies: One situation, five responses,” released Tuesday, examines the ways in which E&Ps have responded to the bust in the industry. Of the more than 500 companies reviewed, about 175 were at risk for bankruptcy, with more than $150 billion in debt, and plunging stock values.

“These companies have kicked the can down the road as long as they can and now they’re in danger of kicking the bucket,” said William Snyder, head of corporate restructuring at Deloitte, in an interview with Reuters.

“It’s all about liquidity.”

William Snyder, head of corporate restructuring, Deloitte.

The reported noted four important takeaways from its analysis:

Access to capital markets, bankers’ support, and derivatives protection, which helped to smooth an otherwise rocky road for the industry in 2015, are fast waning. A looming capital crunch and heightened cash flow volatility suggest 2016 will be a period of tough, new financial choices for the industry.
Spending cuts for two consecutive years (for the first time since the mid-1980s the industry will reduce capex for two years in a row—2015 and 2016) will likely have a substantial and long-lasting impact on future supplies and open new chapters in the geopolitics of oil. These cuts risk slowing the conversion of resources to reserves in frontier locations and eating into the capex required to maintain aging fields and facilities.
Future mergers and acquisitions will most likely go beyond the typical buying reasons of the past—preference for oil-heavy assets and buying for growth/scale. In the near future, returns and economies of scope will likely re-emerge as the top reasons for buying assets/companies, instead of growth and economies of scale.
The focus on lowering breakeven costs to support near-term cash flows could give way to a renewed focus on bolstering the future ROCE (return on capital employed) potential of the industry. As the industry improves performance on costs/ efficiency, its future emphasis will not be on its ability to make profits at low prices, but about generating sufficient ROCE on a large base of devalued investments made in the past.