Australia Prepares for Growing Challenges as Market Environment Evolves

“Companies are moving into a period of capital discipline and are facing up to the fact they are now in an environment where they’re not going to get access to as much capital,” Dartnell said.

“They are also not getting as much free cash flow from their operations if they are in production. Focusing on their capital position is key.”

Cann added: “Now the real risks of oil and gas are becoming very apparent capital is going to get scarce. Once that happens only the very best oil and gas prospects are going to receive funding.”

“This will bring capital discipline into the upstream and the consequence is that we will progressively start to see pressure on the services industry to bring their costs down to match the new netback pricing that the producers want to achieve - that’s certainly on the liquid side.”

Canaccord Genuity Australia Senior Oil & Gas Analyst Johan Hedstrom was able to identify a positive from the situation, saying the oil price would, in the long-term, positively impact the world economy, and later the oil and gas industry.

“Getting a 50 percent reduction in oil prices is a fantastic stimulus and we will get some economic growth thanks to that. That will lead to more demand and things will pick up again. It will take at least a year,” Hedstrom said.

M&A Potential

There is a common belief the evolving conditions will result in an increase in merger and acquisition (M&A) activity, both in Australia and internationally, with highly leveraged companies most vulnerable. 

Cann recalls a substantial spike in M&A during the 1990s, when oil prices also fell by about half. He believes today’s industry may experience similar to what occurred almost 20 years ago.


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