January 6th 2015
No one wants to make a crisis out of a drama but it is hard for offshore specialists not to panic about the price of oil.
This week, Brent crude hit $46 per barrel, which means it is down around 60% on where it was in June and at its lowest for six years.
Energy analysts at investment bank Goldman Sachs have slashed their first-quarter oil-price estimates by 50% – to $42 – but no one knows where the real floor will be.
In the meantime, the oil companies are drawing up their budgets for the next financial year – and the only discussion is what to cut first and how deep.
Edinburgh-based oil consultancy outfit Wood Mackenzie argues that 32 potential European oilfield developments, containing nearly five billion barrels of oil equivalents and needing almost $90bn of spending, are currently at risk – and that was based on crude falling to $60.
Financial risk-management group Company Watch has argued that 30% of the UK’s stock-listed oil exploration and production (E&P) companies risk bankruptcy if the slump in oil prices continues.
The impact on the seismic, rig and supply-boat sectors is going to be severe. Investors are expecting the worst – as can be seen from the collapse of the share price of leading companies.
Farstad Shipping was trading this week at NOK 40 ($5), which means it is nearly 70% lower than this time last year. Siem Offshore was below NOK 3, giving it a total stock-market valuation of not much more than $150m. However, this is a company with more than 30 vessels in its fleet and a raft of new buildings.
While many maritime sectors had continued to struggle since the global financial crash of 2008, the oil industry had been riding high.
Successive years of $100 oil had gone to everybody’s head, with explorers and producers only rowing back when investors started to baulk at the level of expenditure versus dividend.
The service companies themselves had also been adding to the problem by ramping up rig and vessel charter rates to what now look like unrealistic levels.
So the question now is how far will spending be cut in 2015 and beyond? Sveinung Alvestad, an offshore analyst at DNB Markets, predicts it could average 20%. Others believe it could be 30%.
This sudden plunge also is going to leave many oil, rig and support-vessel owners dependent on the goodwill of their banks and other lenders. This will be a period of cash-flow problems and low earnings – as Westshore Shipbrokers analyst Inger Louis Molvaer has stated.
It is also surely going to be a major opportunity for mergers and acquisitions as the strong seize their chance to take out the weak.
The oil price feels like a lift that is travelling down very fast and no one knows when or where it will stop. That is more than a drama.