Oil mid-market sees profits evaporate on global shift and supply glut

16 August 2016 Consultancy.uk 5 min. read
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Oil & gas companies, as well as oil dependent governments, are bearing the brunt of the continued supply glut. Mid-market oil & gas players have, according to a study, seen a massive drop in revenues and profits, while debts are piling up – resulting in investors taking stock of the situation.

The bust in global oil prices has passed the two year mark, with prices declining as much as 70% since June 2014 – hitting middle market independent producers hard as they face significant losses in this market dowturn. A new study by BDO explores what these losses mean in terms of revenue declines, shifting investors confidence and the ability of middle market companies to compete with big players. The study, titled ‘2016 BDO Global Energy Middle Market Monitor’, involves an analysis of data spanning between 2010 and 2015 from 300+ publicly traded middle market oil and gas companies across 37 countries and stock exchanges. The median revenue of these companies is roughly $68 million.

Median annual revenue 2010 - 2015

The oil price slump has had a considerable effect on the annual revenues of mid-market oil & gas companies, particularly in North America. Following steady revenue growth in the US and Canada since 2010 – and a spike in 2014 in the US – 2015 has seen a considerable drop in revenue in Canada (down 41%) and the US (down 44%). Revenues for Australian companies remained relatively stable to 2014, while UK listed companies saw a 4% decline in revenues.

Median pre-tax income 2010-2015

Pre-tax income too saw a considerable downward trend in all regions in 2015. The US, which has enjoyed high levels of pre-tax income over the years since 2010, saw almost four years of gains lost in 2015 – down $132.2 million. Canada, which has had negative pre-tax revenues since 2010, saw a much more significant drop in 2015 – down $30 million – with the recent wildfires likely to cause continued strife into 2016. Australia too has seen its pre-tax income fall significantly as low oil prices cut into income, falling by $31.9 million last year.

Median market capitalisation 2010-2015

The effect of falling revenues, as well as large profit declines – within a market whose long term future is in doubt – means that investors have gotten antsy. Market capitalisation has plummeted since 2013, from around $1.5 billion to around $600 million. In terms of the median for individual companies, a drop of 58% was recorded between 2014, when it stood at $219 million, and 2015, when it stood at $91 million. The largest hit was to Canadian-listed companies, whose market cap fell by 76%.

“The highest average oil price in the last five years occurred in 2013, and for the same period, U.K. AIM-listed oil and gas companies enjoyed their highest market capitalisations. However, the decline in oil prices over the last 15 months has had a more dramatic effect on these companies’ market capitalisations than perhaps would or should have been evident, with the average market cap falling at nearly twice the rate of oil prices in the U.K. In our view, this reflects not only the impact of the oil price environment on the sector, but also a loss of investor confidence and lack of desire to invest in what is perceived as a volatile industry,” says Ryan Ferguson, Partner and Oil & Gas Sector Lead with BDO United Kingdom’s Natural Resources practice.

Median debt ratio

In a bid to stay above water, mid-market companies have turned to the debt markets. Median debt ratios have been on the increase since 2010, as companies have sought to balance their books. Since the price crash, however, particularly US companies have sought to cover shortfalls in their operations, as well as cash flow, with debt. Ratios were up in all countries, in Australia they hit 35% up from 17% in 2014, in Canada 26% up from 21%, while in the US, ratios jumped from 37% to 46%.

The rate of debt increase is expected to slow in the years to come however, as banks – fearing a continued glut in supply – move to tighten lending to the sector. The reduction in lines of credit, mixed with the potential for long term oil-prices below around $50-$60 a barrel, may mean that companies find themselves in long-term distress, and for some, out of business or in the hands of their former competitors.

To stave off bankruptcy, as well as prepare companies for a long-term low oil price environment, the consultancy – like others – suggests a mixture of cost-cutting, innovation, divestment into more profitable market segments, as well as considering restructuring options.