While big players are streamlining operations, smaller ones look to get acquired
Suparna Goswami Bhattacharya
- Analysts expect oil price to come down to $43 a barrel in second quarter of 2015
- Oil companies look for ways to cut costs
- Big players go in for layoffs
- Oil price: No looking up for now
January 27, 2015: Headlines like the above continue to make news in all major websites around the world. Oil prices have been nose diving since the beginning of last September. The price is expected to drop further because of overproduction and a decline in demand from major consumers, like China. But if prices remain depressed, what impact will this have on major oil companies?
While lower prices is not bad news for everyone, especially consumers, oil companies are facing a tough time, probably their toughest since 2008. With a majority struggling to keep their profit margins up, oil firms are left with very little leg space to turn things around in their favour.
Big companies like BP, Shell, Halliburton are making headlines for reasons they will not be proud of — cutting jobs, stock prices going down. Most have been forced to lay off thousands of their employees.
Halliburton Co. (HAL), the world’s biggest provider of fracking services to oil companies, announced last month that it would dismiss 1,000 workers in Europe, Asia, Africa, the Middle East and Australia. The company had said that the decision was not an easy one, but necessary amid tumbling oil prices.
UK-based BP is also set to cut hundreds of jobs in its home country as well as the US. It also announced that it will cost $1 billion to streamline its business this year. The company is also expected to lose millions of dollars in earnings from Rosneft, Russia’s state-owned oil company, as a result of the plunge in crude prices and financial turmoil that has sent the rouble tumbling. BP has a 19.5% stake in Rosneft.
Thus, it comes as a little surprise that companies are reviewing their balance sheet. Aidan Heavey, chief executive officer, Tullow Oil, said: “In the light of current oil and gas sector challenges, including the commodity price environment, we are reviewing our capital expenditure and our cost base to ensure that Tullow is well-positioned for future success.”
For most companies, the bottom line is going to get majorly impacted. As a result, share prices of oilfield services companies like the Halliburton, Schulberger have also been majorly impacted. For example, Halliburton reported about 25% fall in its share price in the past six months.
When contacted, Halliburton in an email response, said: “We recognise there is a concern about the recent decline in commodity prices and expect reduced activity levels by our customers next year. However, Halliburton is well-positioned to handle any market environment. By remaining focused on the company’s proven strategies and processes, we will continue delivering the greatest value to our customers, shareholders and employees.”
For a few companies though, especially those in OPEC region, the impact will be much less, thanks to the good cash coffers built up over a period of time. “Most oil companies in the Middle East have not decreased their annual economy budget spend,” says Gaurav Moda, partner, management consulting, KPMG in India.
However, the same is not true for most companies in Iran, Columbia and Russia.
Many of these firms do not have the financial muscle to withstand a prolonged price fall. “For one, these economies are largely dependent on oil and gas. Also, most companies in this region have insufficient cash reserves,” remarks Moda.
Analysts predict a series of mergers and acquisitions as firms seek out rescue deals, and falling share prices create bargains for larger predators with deeper pockets.
According to Geoffrey Stains, an independent energy analyst from Norway, the big companies might use the opportunity to acquire the smaller ones. “The fact that companies in the UAE and Saudi Arabia have not gone for reduction in oil production to control the falling prices shows that they have enough cushion to survive another five-six months. Thus, for them this is the perfect time to acquire smaller companies and widen their portfolio,” remarks Stains.
For future projects, lower cost of oil will have to be taken into account. Also, drilling in high cost places like the Arctic and other deep water locations could be postponed for now as big companies look to cut costs.
To conclude, it can be said that as of now the continual fall of oil price remains real, especially since OPEC has refused to reduce production in order to maintain market share. Still, this will not have an impact on current projects. Experts say that projects that have already been rolled out will continue irrespective of the decline in oil price as investments have already been paid for.
Until OPEC cuts back on oil production and there is a renewed demand worldwide, investing in oil remains risky.