Historically low oil prices are already pushing smaller oil extraction and services companies into significant distress, before the impact of substantial cuts to the capital expenditure budgets of the major oil companies.
According to the latest Begbies Traynor Red Flag Alert data for Q4 2014, which monitors the financial health of UK companies, the number of oil & gas businesses experiencing ‘Significant’ distress has increased by 69% to 486 compared to 288 in the equivalent period last year, or a rise of 17% in the last quarter alone (Q3 2014: 416). A further breakdown of the sector shows that the real victims of the oil price slump have been the businesses providing services to the oil and gas industry, with ‘Significant’ distress in companies more than doubling from 93 to 201; a massive 116% increase on a yearly basis and a 31% increase in the last quarter alone (Q3 2014: 154).
Julie Palmer, Partner at Begbies Traynor, said:
“Although the major oil & gas companies have been the focus of attention of late, our research clearly demonstrates the devastating impact of lower oil prices on a broader group of smaller businesses in oil and gas extraction and, most markedly, amongst services firms – those providing equipment, consultancy and workers to the industry.
“Smaller oil & gas companies will be hardest hit by historically low oil prices and major cuts to investment in the industry as they lack the cash reserves the big players have to weather the storm. In particular, we expect service firms to face rapidly deteriorating trading as oil rigs are taken offline and extraction firms race to reduce their cash burn in an environment where it is increasingly challenging to raise new funds.
“With oil prices having stabilised and now looking to increase, albeit it from historically low levels, we expect there to be a major wave of consolidation in the industry as businesses race against time to deliver cost synergies or face falling into greater distress. In the absence of successful consolidation, we expect that as many as 50 companies in the sector face administration in the next eighteen months.”
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