The recent TMA Global Annual Conference in Scottsdale Arizona gave us a great opportunity to swap intel and war stories.   The buzz at the conference was around the oil and gas sector.  It created immediate and ongoing comment, not just at the conference but also in the wider media.  See web link from Bloomberg.

As the US banks complete their bi-annual reviews of oil and gas loans, we anticipate that borrowing bases will decline between 35 and 40%.   This will inevitably cause some producers to be

•   unable to meet financial covenants;

•   unable to secure future borrowings;

•   kicked into repayment provision territory; and

•   charged higher interest rates for second lien loans.

Whilst the price of oil per barrel has stabilised, it has more than halved to less than US$50 a barrel over the last 12 months.   Producers and service companies have been hanging on in there, but for how much longer?

At the macro level OPEC and the Saudis may not be on the same page, possibly because it’s impossible.   The Saudi Arabian Monetary Agency foreign reserves have dropped by US$73 billion since the beginning of the oil price decline last year and are being used to fund the deficit created by the drop in oil prices plus reinvesting in more stable sectors.  Fund managers cannot be enjoying that ride.

Blackrock, one of the largest managers of gulf funds, reported second quarter net outflows from EMEA of US$24.1 billion against an inflow of US$17.7 billion in the previous quarter.    The Saudis can fund the oil pump, but the pressure is on OPEC.

The ongoing loan prices are having a catastrophic effect on investment and cap expenditure across the breadth and depth of the sector with, likely, worse to come.  OPEC estimates that worldwide cap expenditure in the sector will be cut by US$130 billion in the next year.  Wood MacKenzie, the energy consultancy, say that US$1.5 trillion of future spending  is uneconomic at current barrel prices and so the squeeze continues down the pipeline.

The producers continue to cut costs where they can and put pressure on service providers.   Comparisons are being drawn with the automotive industry which had to re-think its macro operating strategy some time ago.   Unnecessary specialist and technical iterations needed to be and were ironed out.  The fact that the oil and gas sector has 250 sizes of valve stems in current use, each one a 1000th of an inch different in size, illustrates where lack of cross industry collaboration can end up.

It is likely the pressure on service industries will reach peak over the next 18 months, sniffer dogs are noted as being a cheaper and more effective way of pinpointing gas leaks rather than using teams of contractors; rig clubs are being formed amongst the smaller operators as they join forces to hire drilling rigs more cheaply, and of course, the cost cutting with contractors continues. In the UK and Europe there has been some restructurings in the sector but not at the same level as we have seen in the US – watch this space.

More than US$200 billion worth of oil and gas assets are for sale globally according to IHS Inc. with deals expected to accelerate in Q4 and into 2016.

So, a fundamental shift in the sector is on the horizon and new funds, established private equity houses and other sector players are looking to make a timely entrance and/or killing!