FRESH concerns over the prospects for the North Sea industry have been raised after analysis showed that a third of the UK’s listed oil and gas companies could run out of cash within a year.
The warning, from corporate health monitor Company Watch, follows a sharp slide in the price of Brent crude, which has almost halved since June on the back of cooling global demand.
Brent edged above $60 a barrel yesterday amid concerns about disruption to exports in the wake of escalating clashes in Libya. Traders also drew comfort from plans to stimulate the Chinese and Japanese economies, which would help to lift demand for commodities.
However, Company Watch said that sustained low oil and gas prices are likely to present “significant problems” for the UK’s 126 listed companies operating in the sector, a third of which are not generating any revenues.
The firm’s head of analytics, Ewan Mitchell, said: “Many of the smaller quoted oil and gas were set up specifically to take advantage of historically high and rising commodity prices. The recent large falls in the price of oil and gas could leave the weaker companies in difficulties, especially the ones that need to raise funds to keep exploring.
“Looking at the cash burn of the quoted companies, we conservatively estimate there are 38 – around a third of quoted companies – likely to burn through their cash within a year. In fact, as losses mount there are likely to be more. Our fear is sustained low oil and gas prices will put an intolerable financial burden on the weaker companies, jeopardising many livelihoods.”
Company Watch said that 38 Aim-quoted oil and gas firms are in its “warning area”, which means they are at greater risk of going bust or needing urgent refinancing.
An industry report earlier this month warned that up to 35,000 North Sea jobs could be lost over the next five years, mainly due to a forecast decline in capital expenditure, although spending on decommissioning depleted fields is expected to rise sharply.
However, PwC has argued that slashing industry costs could save up to £15 billion, protect jobs and prolong the lifespan of North Sea fields.
The accounting firm said yesterday that the oil and gas sector will become “increasingly cash-constrained” next year, and predicted that reserve-based lending will become more expensive as banks adjust their base oil price assumptions.
PwC added: “We expect banks to provide some support to the industry as this is a global – not just UK – problem. Nevertheless, even good companies may see some distress if they are in the wrong place in the capital expenditure cycle.”
Badly-needed capital is expected to come from other sources such as sovereign wealth funds and specialist energy investors, while the sector could witness “opportunistic” takeover bids for companies with good underlying assets but the wrong financing structure.
Efforts to make substantial cost savings may also see an acceleration in merger and acquisition (M&A) activity, according to Drew Stevenson, PwC’s UK energy deals leader, who said: “Oil prices remaining at the current level for a sustained period will light the touch-paper for M&A in 2015.
“As the UK industry positions itself for a more uncertain future, we expect to see deal activity levels pick up throughout the year ahead.”
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