KPMG: Firms Must Collaborate, Talk to Financial Stakeholders

KPMG: Firms Must Collaborate, Talk to Financial Stakeholders
KPMG explains why lender and investor sentiment, along with the relationships between the financial sector and oil companies will be critical.

The 18-month slide in the price of crude, the cancellation of billions of dollars of upstream capital spending, the lifting of sanctions on Iran, and bearish forecasts for global economic activity and demand for oil in recent weeks have all served to further unsettle those who supply finance to the upstream sector.

In turn, these factors are leading to further downward revisions to earnings with many oil and gas businesses having increased cash flow difficulties in a market that is still struggling.

Financial institutions have generally been supportive of their investees and customers in the sector so far, but we anticipate that regulatory and capital adequacy concerns will challenge the ability and appetite to continue this support. It is therefore reasonable to expect that liquidity to the industry will accordingly reduce to add further pressure on the sector.

There are also particular issues of complexity and risk in relation to reserve-based lending to the exploration and production sector that are beginning to become more apparent as prices remain lower for longer.

Geoff Jacobs
Geoff Jacobs, Restructuring Director, KPMG
Restructuring Director,

The short-term outlook is very tough. Current crude price levels are unsustainable for the whole industry and the market will rebalance. The question that no one can answer is when this will happen and in the meantime the priority for most in the industry is survival.

The fact that the industry came into this downturn after several years of strong performance has, so far, helped to minimize the degree of financial distress in the market. The impact on individuals who have lost their jobs has, however, been significant.

But the downturn is biting harder despite the raft of cost-cutting measures already implemented by industry, with the further slip in oil price in early 2016 leading to further cost reduction action.

The January reporting season has reflected this downturn with BP’s like-for-like profits halving in 2015, with the company falling into loss during 4Q 2015 and announcing a further 3,000 job cuts. Shell reported its lowest results for 13 years and 10,000 planned redundancies while in the service sector Schlumberger reported a 38-percent drop in profits and another 10,000 headcount reduction with Halliburton also reporting a loss in 4Q.

The Feb. 19 appointment of Blair Nimmo of KPMG as administrator of First Oil Expro Limited, a company within First Oil Group PLC, was a reflection of the significant challenges facing UK North Sea oil and gas companies in the current oil price environment.

The prospect of waning confidence in the sector among lenders is a real concern as they continue to review their portfolios in light of the protracted downturn. Although lenders will want to remain supportive, businesses will have to take the initiative to demonstrate they have a strategy to navigate the current challenges to secure the ongoing support of their stakeholders and maximize their chances of coming through the current difficulties.

The combination of factors playing out in the market means that multidisciplinary teams are increasingly required to work hand in glove with the lenders and businesses to, for example, renegotiate loan terms, restructure businesses for the current conditions and to explore consolidation opportunities through mergers and acquisitions or divestment of non-core activities and assets.

The businesses that come through in reasonable shape will have significant opportunities when the market begins to recover, so there is a tightrope to be walked between becoming overly locked in a short term mentality and keeping a strategic eye on positioning the business for the medium term.

Indeed, the current market will increasingly create opportunities for consolidation and for strategic acquirers to enhance their product and service offerings through mergers and acquisitions at prices that wouldn’t have been achievable before the downturn.

However, the fact remains that no matter how good a business is in terms of its knowhow, services and technology, lender and investor confidence is going to play a key role in determining who is positioned to capitalize on the opportunities that will arise when the upturn begins.

We know that our industry is cyclical and that the market should recover. For now it is a question of not panicking and doing everything possible to ensure that the industry maintains its ability to function when the tide begins to turn. This includes appropriate and timely dialogue with financial stakeholders.

The concept of genuine collaboration is much talked about within the industry just now and it should extend to companies' relationships with the financial institutions and lenders who are major stakeholders in the future of the industry.

Alan Kennedy is the head of oilfield services in the UK for KPMG. Geoff Jacobs is the firm's restructuring director.