BAKU, Azerbaijan, Aug.18
By Leman Zeynalova – Trend:
Capex cuts and cost reductions can help companies to manage revenue losses in the short run, but bankruptcy risks will rise as tendering activity remains subdued. Exposure to the current downturn is mixed, Trend reports citing Fitch Solutions.
“The outlook for capital spending in the global oil and gas sector has deteriorated rapidly since the advent of the Covid-19. At the start of the year, our data had indicated around 2.5 percent y-o-y growth in spending. Currently we expect a decline of around 23 percent. Moreover, the decline has occurred before the market had time to fully repair itself from the previous price collapse.
The last round of capex cuts (2015-2017) was similarly steep, but corporate fat trimming, improvements in operational efficiency and strong productivity gains all helped to cushion to impact. Now the low hanging fruit has been picked and there is little scope for further progress in these areas. A lower cost base and more ‘bang for your OFS buck’ mean that the decline in capex since 2014 will only partially translate into lower long-run supply growth. Nevertheless, the scale of the capex cuts being enacted, the number of projects being deferred and the expected slow pace of future FIDs point to a capital deficit being formed in the market, potentially sowing the seeds of the next upcycle
In general though, there is a clear need for further consolidation in the industry, to liquidate low margin assets, improve operational efficiency and lower the cost base. For those companies with adequate capital and liquidity, the current climate may open the door on opportunistic purchases. However, given the extreme strains on the market, buyers will be few and far between.
Even as deal activity recovers, the targets for investment will likely be highly selective. During previous downcycles, large players with strong balance sheets have taken the opportunity to load up on assets, looking to gain through higher volumes of production in the following upcycle. However, companies are increasingly aware of the markets inability to absorb ever-growing quantities of supply. Strategies have shifted from volume to value, with generally lower tolerance for risk and a waning appetite for capital intensive assets. Increasingly, acquisitions will be made to complement the existing portfolio core, with a growing preference for discovered and developed resources, with a lower cost and lower carbon intensity.
Prior to the outbreak of Covid-19, many oilfield service (OFS) providers were already under pressure, battling significant overcapacity and strains on their profitability. Services cost will deflate, due to the collapse in activity upstream. However, limited scope for further gains in productivity and operational efficiency will cap the downside. Capex cuts and cost reductions can help companies to manage revenue losses in the short run, but bankruptcy risks will rise as tendering activity remains subdued. Exposure to the current downturn is mixed. Regionally, we expect to see the deepest cutbacks in spending in North America, Europe and SSA. Within the sector, exploration is likely to see the sharpest proportional decline in capex, as companies axe discretionary spending and licensing rounds face prolonged delay. In the long run, the sector looks set for consolidation and asset liquidation will likely be necessary to full right the market. OFS providers with the capability to pivot their offerings towards low carbon energy have the potential to outperform, as upstream production growth slows and ultimately declines,” the company said.
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