The bleeding isn’t over for the energy sector, despite the Saudi Arabia-Russia oil deal

ANALYSIS

CALGARY ? A deal between top oil producers Saudi Arabia and Russia to freeze oil output at current levels may signal that oil prices have recently flattened – but that doesn’t mean the end of pain for that oil and gas sector.

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Absent a clear, crisp price recovery, gas and oil exploration and production information mill facing more severe stress in 2016, with many now on the point of bankruptcy, based on a Deloitte study made public Tuesday.

“Even after 18 months of falling oil prices, pessimism hasn’t bottomed out in the gas and oil industry,” the accounting and consulting firm said in 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 cash flow volatility, 2016 is a duration of tough financial choices for the industry, the study says.

Perhaps the most alarming trend is the fact that from 175 global exploration and production companies included in the study with a combined US$150-billion in debt, 50 are now in a “precarious” situation and “the probability of these companies slipping out of business is high in 2016, unless oil prices recover sharply, most of the debts are changed into equity, or big investors infuse liquidity,” Deloitte warns.

The vast majority  – 160 companies – within the group will also be dangerously cash-flow constrained.

So far, the audience (which excludes integrated and national oil companies) has used a number of strategies to deal with the downturn, that has gone from bad to worse and it has lasted far longer 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 compared to the 2008/2009 global financial downturn, when 62 companies filed for bankruptcy. This time around, 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 minimizing dividends.

But with 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 those rated ‘B’ or lower by Standard & Poor’s have 28 percent and 37 per cent of the 2016 oil production hedged, respectively, versus 51 percent and 62 percent, in 2015.

Even after 1 . 5 years of falling oil prices, pessimism hasn’t bottomed out in the oil and gas industry.

“Lower hedged volumes, and also the pressure from banks to possess predictable cash flows, will 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 from the company,” Deloitte said.

With few levers left to drag this year, companies will have to further reduce dividends and share buybacks, plus further spend less, Deloitte concluded.

The continuation of spending cuts will likely possess a substantial and long-lasting impact on future supplies and open new chapters within the geopolitics of oil, Deloitte says. The potential risks include slowing the conversion of resources to reserves and reducing spending to keep aging fields and facilities.

Despite the most obvious pain – worsened in Canada by discounts on already-low oil prices because of lack of export pipelines – there’s 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 revive “respect,” the audience said.

“Our market is being hit hard. 100,000 oilfield sector workers are unemployed,” the association said. “A large number of companies 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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