The crude downturn for exploration & production companies
One situation, diverse responses
Falling oil prices, reductions in drilling activity, and lackluster demand have led to an uncertain path for exploration & production companies. Recent analysis of the oil and gas industry has reflected five options taken by exploration & production companies to traverse this new environment. Discover more about each option and the impact certain decisions have had on exploration & production companies.
The oil and gas downturn has led exploration & production companies to five paths
Deloitte’s analysis delves into how pure-play exploration & production (E&P) companies have prioritized and used various options to survive in a low oil price environment. Despite a significant reduction of drilling activity, supply has declined only marginally, the demand uptick due to reduced prices is less than expected, and oil prices—after stabilizing for a brief period in 2Q15—have slipped to an 11-year low of under $30/bbl.
This report examines five options chosen by E&Ps and analyzes the companies' statuses and responses under each or a set of options.
How many E&P companies have filed bankruptcy since July 2014, and how does this compare to the 2008–2009 oil price downturn?
In the United States, 35 E&Ps with a cumulative debt of under $18 billion filed for bankruptcy protection (liquidation and debt restructuring) between July 1, 2014, and December 31, 2015. It is not just new and small companies that took this course. Companies that have been in the business for more than 10 years (before the shale boom), or survived the 2008–2009 economic downturn, had revenues greater than $500 million (or production greater than 25,000 BOE/d), and even those owned and run by large private equity firms ran out of better options.
Although the US E&P industry has so far shown great resilience, the increase in bankruptcies in the second half of 2015 and the even lower oil prices at the start of the new year point to a challenging 2016 for many E&P companies.
How many E&P companies are financially stressed, and how have the banks supported them?
Although in a marginally better position than the insolvent companies, nearly 35 percent of pure-play E&Ps listed worldwide, or about 175 companies, are high risk, as defined by the combination of high leverage and low debt service coverage ratios. The situation is precarious for 50 out of these 175 companies due to negative equity or leverage ratio of above 100; stock price of some of these has already dipped below $5, making them penny stocks. The probability of these companies slipping into bankruptcy is high in 2016, unless oil prices recover sharply or a large part of their debt is converted into equity or big investors infuse liquidity into these companies.
This report also addresses how the borrowing base for these companies has changed and what the credit line support looks like in 2016.
Did some E&P companies dare to time the downturn?
Despite weak industry fundamentals, many E&P players displayed a strong appetite for risk, with some even trying to time the downturn. Surprisingly, almost half of these companies had low capacity to take risks, due to their high leverage and weak operational performance. About 40 percent of asset deals by value have been for non-producing fields, which have high capex commitments and generate no immediate cash flows. In addition, 64 percent of corporate deals by value had a debt component of more than 20 percent, at a time when bankers are tightening credit norms for the industry.
This report examines when companies took risks by changing their hedged positions.
What financial adjustments have E&Ps made to survive the downturn?
Seeing high leverage levels and negative cash flows, E&Ps worldwide are making financial adjustments. Since 2Q14, E&Ps have saved or raised cash to the tune of $130 billion from capex cuts and other financial measures such as asset sales, equity issuance, and lower shareholder distribution.
This report also addresses who adjusted what and by how much, as well as other adjustments E&P companies can make to survive the downturn.
We know E&P companies have reduced costs—but by how much?
By mapping productivity, production, and costs together, it appears higher well productivity was the dominant driver in reducing industry costs per BOE in 2H14 (a period of increased production), followed by switching from marginal to core fields in late 2014 and early 2015 (flat production growth). Cost reduction programs then started to make a visible impact in mid to late 2015.