While commodity oil prices are inching toward recovery, it will take time for middle-market oil and gas producers to recover from the recent oil price bust cycle, according to the findings of BDO’s second annual Global Energy Middle Market Monitor study.
Global accounting and consulting firm BDO found that the median market cap among mid-market oil and gas companies declined 58 percent between 2014 and 2015, from $219 million to $91 million. Historic price-earnings ratios also decreased as abruptly as earnings, declining to 6.4 this year versus 12.4 in 2015, and an overall high of 25.6 in 2010. BDO found that medium revenue across all companies assessed fell from $96.9 million in 2014 to $67.6 million in 2015, and the median debt ratio grew by 25 percent year-over-year.
For the study, BDO reviewed and analyzed financial data reported by 304 publicly traded middle market oil and gas companies from 37 countries and international stock exchanges from 2010 to 2015, primarily from exchanges in the United States, Australia, Canada and the United Kingdom. The companies analyzed reported revenues of up to $1.5 billion, with a median revenue of $67.6 million.
The middle market has been instrumental in the growth of the international energy sector, helping to decentralize the industry and spread the wealth well beyond the Organization of Petroleum Exporting Countries. However, the rapid growth that took place over the past 10 years was unlikely to last, and it appears that many may have lost sight of the energy industry’s susceptibility to boom and bust cycles, Charles Dewhurst, global leader of BDO’s natural resources industry group, said in a June 28 press statement.
“But now that the oil price downturn has checked our collective hubris, we are in a position to reorient, reevaluate and rebuild,” Dewhurst commented.
BDO said in the report that its top takeaway was that no company has been immune to the price slump, and companies may be forced to make difficult choices in order to survive – but those who are able to make smart cuts and seek out creative financing opportunities are best poised to thrive when the market finally recovers.
The firm recommended strategies that mid-cap firms can pursue to prepare for a more stable future. These include:
• Seeking opportunities to diversify their business
• Consider alternative funding sources
• Evaluate hedging arrangements
• Be strategic in asset, personnel cuts
• Keep prioritizing innovation
• Explore restructuring options
Oil and gas companies have responded to the recent oil price downturn by reducing capital expenditures and laying off workers; some companies have filed for bankruptcy. The oil and gas industry is expected to cut $1 trillion from planned spending on exploration and development because of the oil price slump. The downturn has companies collaborating in ways they never thought possible, including sharing tools and drilling well plans. Industry insiders have said that oil and gas companies will need to take a new approach to projects and operations to avoid delays and cost overruns. GE and Shell report that Big Data and digital technologies will enable the industry to shift from Operations as an Art, or operations based on workforce expertise, to Operations as a Science, or decision-making driven by data.
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