Profit warnings spike among UK’S oil and gas firms

● Consolidation within oilfield services is ‘inevitable’ according to latest EY study

Oil and gas companies listed in the UK recorded more profit warnings in the second quarter of 2020 than during the whole of last year in a fresh sign of the woes afflicting the sector.

There were ten alerts issued in the three months to the end of June, compared with seven during the course of 2019, according to EY’S latest profit warnings report.

In the first six months of 2020, there were a total of 14 profit warnings issued by FTSE oil, gas and coal companies. Of these, about four-fifths were attributed to the Covid-19 emergency.

EY recorded these warnings across the entire oil and gas supply chain, with the size of the downgrades reflecting the “rapid increase” in both short and long-term uncertainties during 2020.

Celine Delacroix, EY’S global oilfield services leader, said: “The biggest short-term issue for the oil and gas sector is the sharp drop in demand and in oil prices, triggered by the Covid-19 pandemic.

“While dealing with rapid decreases in the oil price isn’t new to oil companies, the root cause this time is more complex and the outlook more uncertain than ever.

“Wemayhavealreadypassed ‘peak oil’ and the sector is radically rethinking both its short and long-term outlook. It’s this combination of low prices and exceptionally high levels of uncertainty that has led to significant capex cuts and widespread write-downs.”

The report noted that with profitability an increasing issue for the oilfield services sector, even before the pandemic, the predicted 20 per cent cut to exploration and production capital expenditure in 2020 was likely to place more pressure on these businesses.

Delacroix added: “For some, the next few months will be about survival and their priorities will be cutting costs and raising capital before debt markets tighten even further.

Long-term growth and value depend on companies creating a stronger focus on technology, efficiency and investment to meet the related challenges of a low-price environment and decarbonisation.

“Consolidation within oilfield services is inevitable. The companies that drive forward with M&A activity and embrace diversification to be cleaner and greener are the ones most likely to secure a positive, long-term future.”

Clean technology and renewables was identified as the number one sector expected to drive growth in Europe in the coming years by international investors in the separate EY “attractiveness” report 2020. While this survey was conducted prior to the pandemic its findings hint at future opportunities for Aberdeen.

Aberdeen-based Chris Durling, EY director in strategy and transactions, said: “The oil and gas industry, particularly in Aberdeen, has an enviable track record of developing innovative, digital and transformative businesses, that have proven their resilience through multiple challenges.”