Despite a daunting industry outlook, American and Candian companies have found one bright point: robust reserves
BRUSSELS – As global prices recover and the oil and gas industry begins to show signs of life, a new study from BDO shows that investor sentiment towards middle market companies has soured and the short-term outlook is bleak.
According to the BDO 2016 Global Energy Middle Market Monitor, the median market cap among middle market oil and gas companies dropped 58 per cent between 2014 and 2015—from $219 million to $91 million.
Historic price-earnings (PE) ratios took a hit as well, decreasing as abruptly as earnings. The median historic PE ratio fell to 6.4 this year, compared to 12.4 last year and an overall high of 25.6 in 2010.
“The middle market has been instrumental in the growth of the international energy sector, helping to decentralise the industry and spread the wealth well beyond OPEC to all corners of the globe,” said Charles Dewhurst, Global Leader of the Natural Resources industry group at BDO, who argues that the sector has gotten its reality check and is now poised to make a steadier—and arguably more sustainable—recovery.
“But the rapid growth we saw over the past decade was unlikely to last, and it appears that many may have lost sight of the energy industry’s susceptibility to boom and bust cycles. But now that the oil price downturn has checked our collective hubris, we are in a position to reorient, re-evaluate and rebuild.”
Industry struggles with declining revenues, profits
Year-over-year changes in median annual revenue highlight that the pain of the price slump truly hit the global energy sector in 2015: The median revenue across all companies assessed fell by about 30 per cent, from $96.9 million in 2014 to $67.6 million in 2015.
As revenues have slipped, so have profits for middle market oil and gas companies. Globally, median pre-tax income declined from $5.9 million in 2014 to a net loss of $30.2 million in 2015, an overwhelming 614 per cent decrease. After taxes, net income dropped from $5.1 million to a loss of $30.5 million, a seven-fold decline.
Energy companies fight to secure capital.
As margins and investor confidence have slipped, oil and gas companies have struggled to secure capital to keep their businesses afloat.
Last year’s Global Energy Middle Market Monitor found that companies had grown more leveraged as they turned to debt financing to weather the storm, and this year’s study reveals that this trend largely continued in 2015.
The median debt ratio grew by nearly 25 per cent this year, with Australia seeing debt ratios double. Meanwhile, the U.K. saw a modest 11 per cent increase, while Canada and the U.S. saw median debt ratios largely in line with global trends.
North American companies see resilience in reserves vitality.
Despite a daunting industry outlook, North American companies have found one bright point: robust reserves vitality.
While median reserves in general have fallen 35 per cent over the past year—from 51 million BOE to 33 million BOE—the median reserve replacement rate remains at 101 per cent.
Though less than last year’s median replacement rate, which reached more than 250 per cent, the figure nevertheless demonstrates middle market North American companies’ ability to maintain momentum in the midst of declining prices.