The Press and Journal (Inverness, Highlands, and Islands)
Big ‘restructuring’ predicted for 2021
Arestructuring specialist has warned that more North Sea oilfield services firms are “operating in crisis mode”, and he expects to see more insolvencies next year.
Chad Griffin, a partner at FRP Advisory, said a dearth of project activity, “severe pressure” on pricing and less flexibility from lenders on debt deadlines were being amplified by the biggest oil price correction in decades.
Mr Griffin said those factors pointed towards a “wave of consolidation and reduction of capacity” in 2021.
He predicts the North Sea will be hit by more business failures and a “deeper level of restructurings” than was the case during the last downturn, which struck in the second half of 2014.
Very few exploration and production (E&P) or oilfield service firms became insolvent in the years that followed as they had a much stronger “base position” than they do now.
Mr Griffin said government policies could defer business failures during the current downcycle, but estimates that around 20 insolvencies over the next two years was “eminently possible”.
He expects service firms to be the “primary casualties”.
He said: “We are seeing a growing number of businesses operating in crisis mode by cutting costs, deferring capital expenditure and trying to preserve cash.
“For some E&P businesses, the hedging of oil prices during 2020 has helped maintain revenue, but these benefits are receding and will offer little benefit in 2021.
“The same is true for oil service companies where 2020 backlog has provided short-term respite.
“In addition, Covid-19 is weighing heavily on sector confidence and long-term oil demand, which in turn is likely to affect investor appetite for risk.”
In March, Norwegian
energy research consultancy Rystad predicted more than 200 oilfield services firms (OFS) across the UK and Norway were “set to become insolvent” due to the coronavirus outbreak.
The UK Government’s job retention and emergency loan schemes have kept firms afloat for longer than would otherwise have been the case.
Industry body Oil and Gas UK (OGUK) acknowledged many companies in the supply chain were “fragile” and said securing support from the UK Government in the form of a No r t h Sea transition deal would be crucial for safeguarding the skills required for the decarbonisation drive.
OGUK marke t intelligence manager Ross Dornan said: “The industry is currently facing one of its most difficult periods, with a triple whammy of low oil and gas prices along
with the operational impact caused by Covid-19 leading to a significant fall in activity levels and new investments.
“With this coming so soon off the back of the previous downturn, many companies across the supply chain are in an increasingly fragile position.”
He added: “OGUK is working closely with members, regulators and governments to ensure that the industry is able to remain as competitive as possible to retain and rephase activity, including new contracting models and new ways of working.
“This is crucial from an energy security perspective and also importantly provides much-needed new work for supply chain companies to service.
“We would also reinforce the importance that all companies across the industry work in line with O G U K ’s supply chain principles.”
Meanwhile, a leading energy sector lawyer has predicted low prices and dwindling dividends could encourage more investors to move away from oil and gas in favour of renewables.
Norman W i s e l y, managing partner at legal firm CMS Aberdeen and co-head of its oil and gas team, also said he does not expect the C o v i d -1 9 pandemic to slow moves within the sector to prioritise energy transition.
Mr Wisely added: “What will be interesting is that, if there is less investment into oil and gas short term, there may be an oil price increase in the medium term.
“That ma y in turn encourage certain companies, certainly not the European majors, to further invest in oil and gas. I don’t think we see too many oil and gas mega projects coming in the near term; I think we’re talking about more incremental types of developments.”