North Sea oil industry’s plight lures buyers
Analysts say the sector has become a buyer’s market as firms that are short of cash or need to service debts desperately look for a white knight to save them.
Oil and gas expert Zac Phillips, of corporate finance outfit SP Angel, estimates that investors are currently able to pick up more than £1.60 worth of assets for every pound they spend.
“We are talking about people who can invest for the longer term to earn out that value,” he said.
Sovereign wealth funds, many of which have been created out of oil wealth when the price was high, will probably be among the buyers.
Phillips said: “They are run like aggressive corporate raiders – if it fits their profile and it’s cheap, they’ll take it.”
Well-funded national oil companies are also said to be among the potential predators, while some shareholders and fund managers with holdings across the sector are trying to encourage merger activity aimed at strengthening the firms in which they have invested.
Many smaller producers in high-cost basins such as the North Sea are seeing their balance sheets stretched after the price of Brent has tumbled from more than $110 a barrel six months ago to around $50 currently.
Investment cases had taken into account the fact that prices would probably drop, but the speed and extent of the retreat has been far greater than expected.
Richard Spilsbury, oil and gas capital markets partner at PwC in Aberdeen, said those needing to service debt this year are especially vulnerable.
Small and mid-cap explorers have been the first to suffer, but ultimately the service sector is also likely to come under pressure, he suggested.
“It’s an ideal opportunity for private equity or companies with better balance sheets to build their business by picking up assets that can become strategic,” he said.
Many sovereign wealth and national firms are themselves nursing paper losses after buying North Sea assets when the market was at its peak, but they have the reserves and patience to hold out for a recovery.
SP Angel predicts that crude will end the year at around $75 a barrel and continue up to $125 by 2019 as the current cutbacks to exploration and development budgets start to hinder supply.
Iain Armstrong, an oil analyst at Brewin Dolphin, agreed that the price will have to rise. He said: “$50 a barrel is not sustainable, whatever the producers say. The Saudis can probably go on long term but the rest of the market can’t. You don’t go into business to break even. Logic says they can’t carry on with this.”
As well as the cutbacks announced by the likes of BP and oil services giant Schlumberger last week, the industry is also saving money by renegotiating contractor charges.
Armstrong noted that the majors should be able to achieve savings of 15 to 20 per cent. Along with continuing benefits from technology, that means they don’t need prices to bounce back to last summer’s levels to restore their profits in full. Rig hire prices have already fallen significantly.
Spilsbury said that a correction in the cost of oil services in the North Sea was overdue, after prices had risen far faster than in other basins.
“Firms had been letting staff go in Aberdeen since early last year, but it was masked by the high oil price and the referendum,” he added.
SUBSCRIBE TO THE SCOTSMAN’S BUSINESS BRIEFING