In a report “heard around the world”, Deloitte recently reported that there was a high risk of bankruptcy for one third of all oil firms this year The news was reported by Reuters (and which was subsequently cited by many outlets) raised even gloomier prospects regarding the future of the oil industry . The paper notes that while the level of bankruptcies are nowhere near that reached during the great financial crisis, oil only recently fell to $30 or so a barrel. At this level we can expect to see a lot more of those! We were trying to locate (and unable) to find the original report from Deloitte, but just got some luck. Below is the full 20 page report which readers can view for themselves.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
oil firms – Intro
Even after 18 months of falling oil prices, pessimism has not bottomed out in the oil and gas industry. In fact, the most optimistic forecast does not expect a recovery in prices or a significant change in market sentiment before late 2016. More than two years of low and depressed prices will not only increase the stress and further fragment the response of players in 2016, but also raise several questions for the industry.
Despite a significant reduction of drilling activity, supply has declined only marginally, the demand uptick due to reduced prices is less than expected, and oil prices, after stabilizing for a brief period in 2Q15, have slipped to an eleven-year low of under $30/bbl.
This study identifies five options chosen by E&P companies and analyzes the companies’ statuses and responses under each or a set of options. The five options are filing for bankruptcy (“Submit”), seeking aid from financial institutions (“Borrow”), venturing out to seize an opportunity or time the downturn (“Venture”), pulling financial levers to correct balance sheets (“Adjust”), and optimizing operations (“Optimize”)
1. Access to capital markets, bankers’ support, and derivatives protection, which helped to smooth an otherwise rocky road for the industry in 2015, are fast waning. A looming capital crunch and heightened cash flow volatility suggest 2016 will be a period of tough, new financial choices for the industry.
2. Spending cuts for two consecutive years (for the first time since the mid-1980s the industry will reduce capex for two years in a row—2015 and 2016) will likely have a substantial and long-lasting impact on future supplies and open new chapters in the geopolitics of oil. These cuts risk slowing the conversion of resources to reserves in frontier locations and eating into the capex required to maintain aging fields and facilities.
3. Future mergers and acquisitions will most likely go beyond the typical buying reasons of the past—preference for oil-heavy assets and buying for growth/scale. In the near future, returns and economies of scope will likely re-emerge as the top reasons for buying assets/companies, instead of growth and economies of scale.
4. The focus on lowering breakeven costs to support near-term cash flows could give way to a renewed focus on bolstering the future ROCE (return on capital employed) potential of the industry. As the industry improves performance on costs/ efficiency, its future emphasis will not be on its ability to make profits at low prices, but about generating sufficient ROCE on a large base of devalued investments made in the past.
Full report on oil firms here -> us-er-crude-downturn