Businesses and lenders in the upstream oil and gas sector will have to work hand in glove in the coming months in what promises to be one of the toughest years faced by the industry in recent times, according to professional services firm KPMG.
The continuing slide in the price of crude, the cancellation of billions of dollars of upstream capex, the lifting of sanctions on Iran, and bearish forecasts for global economic activity and demand for oil in recent weeks have all further unsettled investor and lender confidence in the sector.
Meanwhile businesses across the industry, from operators through to SMEs in the supply chain, are grappling with further loss and deferral of projects and increased competition as those enterprises previously focused on capex turn their attention to opex opportunities. This is leading to further downward revisions to earnings with many having increased cash flow difficulties in a market that shows little prospect of improving in the short term.
Financial institutions have, to date, generally been supportive of their customers in the sector but KPMG anticipates that regulatory and capital adequacy concerns will impact the ability and appetite to continue this support and expects that liquidity to the sector will accordingly reduce to add more challenges to the market.
Alan Kennedy, KPMG partner in Aberdeen and UK head of oilfield services, said: “The short term outlook is very tough. Current crude price levels are unsustainable for the whole industry and the market will rebalance. The question that no one can answer is when this will happen and in the meantime the priority for most in the industry is riding out the downturn.
“The businesses that come through intact will have significant opportunities when the market begins to recover, so there is a tightrope to be walked between becoming overly locked in a short term mentality and keeping a strategic eye on positioning the business for the medium term when conditions improve.
“No matter how good a business is in terms of its knowhow, services and technology, lender and investor confidence is going to play a key role in determining which will be positioned to capitalise on the opportunities that will come for the industry,” said Mr Kennedy.
Geoff Jacobs, KPMG director and head of restructuring in Aberdeen, said: “The fact that the industry came into this downturn after several years of strong performance has, so far, helped to minimise the degree of distress in the market. However, the length and depth of the downturn is continuing to bite hard despite the raft of cost reduction measures already implemented by industry.
“The prospect of waning confidence in the sector among lenders is a real concern as they continue to review their portfolios in light of the protracted downturn. Although lenders will want to remain supportive, businesses will have to take the initiative to demonstrate they have a strategy to navigate the current challenges to secure the ongoing support of their stakeholders and maximise their chances of coming through the current difficulties.
“The combination of factors playing out in the market means that multidisciplinary teams are increasingly required to work hand in glove with the lenders and businesses to, for example, renegotiate loan terms, restructure businesses for the current conditions and to explore consolidation opportunities through M&A or divestment of non-core activities and assets.
“Collaboration is a priority for the industry now and that also extends to the financial institutions with a stake in it. We know that our industry is cyclical and that the market will recover. For now it is a question of not panicking and doing everything possible to ensure that the industry maintains its ability to function when the tide begins to turn,” said Mr Jacobs.