A market correction is coming, but it may not be pretty for all current players in the energy industry.
With West Texas Intermediate crude oil at $56.06 per barrel (bbl) as of press time, the oversupplied market is keeping prices low, and that oversupply isn’t likely to change soon. In spite of the low prices, increased productivity from the shale boom has kept production levels up. Crude production in the U.S. is expected to increase from an average of 8.7 million bbl/d in 2014 to 9.2 million bbl/d in 2015 and to 9.3 million bbl/d in 2016, according to the U.S. Energy Information Administration’s recent Short-Term Energy Outlook.
If drillers won’t cut back on production voluntarily, the market’s natural selection process may weed out those who can’t meet their financial obligations while prices remain distressed. Those companies will likely fall to bankruptcy or shop for a better-positioned buyer on the M&A market.
“The impact of low prices will be felt across the entire value chain,” said Matthew Jurecky, GlobalData’s head of oil and gas research and consulting in a statement.
Compared with the upstream sector, the midstream has remained largely protected from the price volatility thanks to the fee-based, take-or-pay contracts common to pipeline operators. However, that can’t last forever and already some midstream companies are struggling.
“Companies heavily exposed to emerging or speculative production areas counting on future growth are vulnerable, whether pipeline operators or service companies,” Jurecky said. “The more prolonged the period of low oil prices, the more exposed companies will be.”
While those who aren’t sufficiently prepared for this low-price period will struggle and perhaps founder, well-organized and resourceful companies will stand firm and may even be able to pick up the pieces and tuck them into asset portfolios for better times in the future. Good acquisition prospects will be companies with low cash reserves and those with substantial debt beyond what they can repay with current cash flow.
Those companies with extra capital available for growth opportunities are in a prime position to pick up distressed assets. With acquisitions slowed down substantially—to $829.8 million in March from $2.9 billion in February, according to research and consulting firm GlobalData—now is the prime time for those “patient contrarians now able to buy when the market is at its lowest and confusion reigns,” Jurecky said.
With asset values so low in the current environment, those who can snap up great buys now stand to benefit in the long term as the values appreciate with rising prices in the future.
“The fruits of planning will be lower debt obligations and cash reserves that support companies through years of low oil prices and also provide for acquisitions without stressing balance sheets,” Jurecky concluded.
—Caryn Livingston, Associate Editor, Digital News Group. Contact Caryn at firstname.lastname@example.org.
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