Restructuring expert forecasts 'wave' of consolidation in North Sea

The current downturn in the North Sea is likely to see a far deeper level of oil and gas restructurings and more insolvencies than in 2015, according to a veteran of such deals.

The next year is going to be tough, warns Griffin. Picture: Andrew Milligan/PA Wire.

Chad Griffin, a restructuring specialist with FRP Advisory, was heavily involved in many oil and gas and service sector restructurings in the last cycle, and is urging firms in the sector to conserve cash, cut costs and be highly competitive on price.

He said 2015 is the last comparable period when there was a much stronger base position than currently, and he is suggesting that primary casualties of this cycle are likely to be oil service companies and second or third tier businesses lacking the capital and scale to endure the growing financial pressures set to affect the sector next year.

“The key drivers of this cycle will be cash, costs, pricing and consolidation” he said. “Businesses are facing huge pressure to win work and generate cash whilst simultaneously drive down costs. There is also the added burden of severe pressure on pricing and potentially a lower tolerance from lenders to extend debt terms.

The key drivers of this cycle will be cash, costs, pricing and consolidation, the restructuring specialist also predicts. Picture: Rachel Hein Photography.

"All these factors are being amplified by the biggest oil price correction in decades and are pointing towards a wave of consolidation and reduction of capacity. We are seeing a growing number of businesses operating in crisis mode by cutting costs, deferring capital expenditure and trying to preserve cash”.

He added that for some exploration and production (E&P) businesses, the hedging of oil prices in 2020 has helped maintain revenue, “but these benefits are receding and will offer little benefit in 2021”. He continued: “The same is true for oil service companies where 2020 backlog has provided short term respite. In addition, Covid-19 is weighing heavily on sector confidence and long-term oil demand, which in turn is likely to affect investor appetite for risk.”

According to FRP Advisory, during the last oil price correction in 2015 there were “very few” UK insolvencies in the E&P or oil service sectors, and financial restructurings from the last downturn were typically “amend and extend,” where debt would remain in place, but maturities would be deferred.

It comes after a recent survey of oil workers revealed a picture of low morale, mass redundancies and little faith in the companies that make up the industry.

Griffin continued: “Looking ahead, this next cycle may be quite different with the Corporate Insolvency and Governance Bill 2020 influencing the landscape. The legislation allows for a restructuring plan which provides far greater scope to cut debt more deeply… We may also see the use of ‘light touch’ administrations where administrators delegate operational responsibilities back to directors to achieve a more effective and lower-cost insolvency process.

"In the service sector, over-capacity is at the root of the problem but stronger businesses with newer technology, better quality assets and well-regarded management teams are likely to fare better.

“The next year is going to be tough and we would urge businesses to focus on conserving cash, reducing costs and be highly competitive on price. It is better to keep trading and working the assets than cover the ongoing costs of mothballing those assets. Businesses still trading will then be in a position to tender for work and capitalise on new opportunities that arise.”

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