Financial Pressures To Drive Industry To Consolidate

Topics: Asset/portfolio management
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Pressure is growing this year for exploration and production (E&P) companies to “face the reality of a prolonged period of low prices,” said Alan Cunningham, technical director for Gaffney, Cline & Associates.

Working for a company whose core business is calculating the value on oil and gas reserves has given him a view of how the financial pressure on companies has increased over the past year as it has become increasingly obvious that oil prices are going to remain low.

For investors, this hurts earnings and reported reserves for E&P companies in high-cost plays. While this can apply to deep­water or heavy oil projects, it is particularly true in US shale because of how reserves are booked, he said. Lower prices can depress two key measures of credit worthiness: cash flow and the value of oil and gas reserves.

Because reserves are based on how much oil and gas can be profitably produced, companies in plays where the cost of adding production is greater than the current value of oil and gas are facing reserves reductions and impairments, which is the term used for reductions in the value of oil based on formulas used by lenders to evaluate loans.

“Impairments are more likely to occur first in areas with higher costs and lower margins, which is why the North American unconventional and heavy oil assets are particularly vulnerable,” Cunningham said.

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Financial Pressures To Drive Industry To Consolidate

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

29 January 2016

Volume: 68 | Issue: 2