Chad Griffin
One feature of COVID-19 has been acceleration of change, and underlying trends away from hydrocarbons such as energy transition, agile working and greater use of technology may leave a permanent impact on long term oil demand. Combined with greater risk factors, this may undermine the economic rationale for more patient, supportive approach to oil sector restructurings.
How do you think this will impact the future of the industry?
There may be further sector consolidation in a drive for scale and resulting cost and funding economies. The identity of the consolidators may be different to the last downturn, which saw significant private equity and distressed debt fund interest in the sector’s restructurings. Many of those funds are now in harvest and exit mode and may not have the appetite for additional acquisitions. That said, there will undoubtably continue to be appetite for good assets at realistic prices. There is also a question mark over end of life assets. Good assets with large reserves of oil have the potential to make vast sums of money, but for those that are at the end of their life there is a need to decommission and that comes at a huge cost. We could see companies fail as a result of not being able to fund these decommissioning projects.
13 The number of E&P insolvencies since the last oil price shock 19.33 Oil price dropped to $19.33 (per barrel) in April 2020 The number of services insolvencies in the last five years 22
Will the oil service sector trends mirror E&P?
Unfortunately, we expect further distress in the oil service sector. For many supply companies it must seem as though it has been a series of never-ending restructuring processes for the five years since the last oil price shock. Although E&P recovered somewhat, in many areas of the oil service sector conditions have remained depressed. Over capacity is at the root of the problem, meaning pricing levels have remained stagnant even if utilisation may have risen. It is likely that we will see greater casualties of oil service companies in this cycle. We expect that the stronger players with newer technology, better quality fleets and well-regarded management teams will fare better – those that are no longer economically viable could end up with underutilised vessels and drilling rigs for long periods of time, with some tonnage exiting the market. The market challenges facing many smaller and financially weaker companies in the service sector means that they will face existential challenges over the next 12 months, with pressures mounting as current backlog runs out. Businesses should focus on conserving cash, take actions to reduce costs and be competitive on price – it is better to have working assets that cover the costs than an idle ship that still needs to keep up payments for crew, insurance and storage. This is what all management teams are focused on, and they should continue to keep a close eye on operations.
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