Will 2015 be Armageddon for Independent Oil Companies?
By Sunny Oputa
It is still early in the year, but not young enough to say that the future of oil is not totally bleak. Amid the uncertainties and the global continuous crash of the price of oil, there is great ray of hope that towards the mid of 3rd Qtr the oil and gas market will start gaining better plasma flow that would cause the market to rebound. While big oil companies such as Exxon Mobil, Shell, BG, CNOOC, Chevron and others would have better resilience to tarry until the next resurrection of oil price back to $80 per barrel; if the price of oil continues with its anemic trend, it will be apocalyptic enough to say that 2015 would not be the best of year for most independent and domestic oil companies.
Optimism is high that the market will readjust and the upcoming dynamism or efficiency will be propelled by the increase in the accumulated income of consumers that will be willing to purchase more products and service. The market is made up of people, products and services. Market of any sort is not naturally planted on its own but is closely or remotely manipulated or shaped by man. Therefore, the market is not stupid but always waits for people which are the bridge and principal actors to act.
Big oil companies have better economy of scale and financial strength to weather the looming storm until salvation period. The mega oil companies were not totally taken aback by the recent somersault in the market since some of them started four years ago to readjust their portfolios through divestment in some international assets that were not cash cows; streamlining operations in highly politically tensed areas and retrenching from non-core operations. While the big companies were focusing on cost saving mechanisms and enhancing better operational management with intents of reducing CAPEX and OPEX, some of the independent oil companies exposed their appetites to garner more assets through quick purchase of assets and imploring high cost in exploration and production because the price of oil at the time could cushion all these costs and still ensure meaningful profits.
Today, most of the independents have found out that the financial health of their companies pose much worry that could lead to their demise if the price of oil continues to collapse down to $40 per barrel. Independents would be forced to ensure drastic retrenchment of their human capital, reduce capital expenditures of all sorts - possibly back off from further exploration and purchase of new assets for the time been. Only the independent companies with better management efficiency that would survive the looming debacle before the market start to have another breath of fresh air.
Amid dwindling revenues and long term debts that would start calling for repayment soon, activist shareholders would be at dagger-point with management of various independent oil companies to divest abundantly, sell or hang themselves. In fact, 2015 seems to be the year of Armageddon for large and small caps that has less strategic agility to make the best out this global complexity. The shellacking that some of the independent oil companies could suffer this year will lead to more downgrading, divestments, merger and acquisitions, total buy-outs even collapse for those that will be slow in reacting towards the shift in the market. The hand writing on the wall is getting clearer as this parallax aligns with the foreseen shift in paradigm. It has become evidential in the manner in which Repsol has reached agreement to buy Talisman the Canadian independent oil company; Seplat Petroleum Development Company a large-to life independent oil company in Nigeria that trades in the London Stock Exchange has opened up discussion to buy Afren an independent oil company that recorded successes in the past five years which is in the ilk of Tullow Oil, but is now having a hemorrhage. Towards the end of 2014 the industry witnessed the acquisition of Baker Hughes by Halliburton making it the second largest global oil service company following Schlumberger. Analysts are looking at Tullow Oil which is known as the “Golden Boy” of independents as a result of the company’s huge success and recent Mida’s touches in assets in Sub-Saharan Africa as a voluptuous meat dangling before Exxon Mobil and CNOOC. Analysts are of the opinion that Tullow’s vast experience and successes in exploration will be a good match for Exxon Mobil’s production efficiency and big wallet.
As the oil glut lingers, United States Shale oil would be doomed. The Texas Eagle and Anadarko Basins may not be as competitive again as the Bakken. This might pose another bad taste for companies such as Apache Corporation and Anadarko Petroleum. Further divestment of assets may not be a solution to their ailments and the need to cut down long term debts and the urge to compete at the Bakken could be the bait that would pull them into bellies of Exxon Mobil, BG, Chevron and Shell International. According to Rex Tillerson, the CEO & Chairman of Exxon Mobil, he is comfortable with his company’s shale operations. Tillerson stated further that the lower prices of oil will lead to a “sorting out” of small unconventional players in the U.S.
The Good News:
The good news is that as the price of oil plunges the daily cost of renting rigs has drastically dropped. In 2013 it was costing between $350,000 and $650,000 daily to rent typical offshore rigs. The current situation has brought down the price of daily rental of rigs to almost $200,000. Many big oil companies would likely pack-up rigs as they plan to reduce capital expenditures this year. This could be a good time for independents that are financially stable and national oil companies to engage in production at lower OPEX. Those that will be able to sustain production will reap heavily by 2016. This will also be another good year for consumers that will have extra cash in their pockets, if U.S Treasury doesn’t tighten the gap by increasing interest rate.
This is the year of prudence and increase management efficiency. It is only the agile companies with knack for innovation, proper cost management without sacrificing quality, safety and environmental protection and balanced appetite for risk that will remain afloat. Companies will be forced to run good economics and go beyond the rush utilizations of NPV, IRR and Payback Periods in their decision making on projects. Managements that will be focused enough to blend the use of tested unconventional and conventional technologies that could produce results at minimum costs are the likely ones to survive this pervading ordeal.
A time for Change
I won’t agree enough with Patrick McGroarty and Drew Hinshaw of Wall Street Journal, writing under the heading “Oil price Drop Daunts African Rulers” state that some of Africa’s most entrenched leaders are facing an unprecedented challenge from an unexpected foe which is the falling oil prices. Some of the leaders of rich oil nations in Africa have used revenue from crude oil to consolidate powers and created international back-ups. The falling price of oil will expose them as they have nothing else to offer to their citizens, also lack of development will become more apparent as oil companies corporate social responsibility and investments on charity projects will decline, the support from their foreign allies will also drop as the relationship were based on interests in oil trading. This situation may trigger political rifts to be watched in Sub-Saharan Africa and also in Middle East. According to industry analysts, Russian could face gigantic political tension if the roubles continued to be walloped by the sharp drop in oil price. The situation would be akin to William Butler Yeats poem entitled “The Second Coming “ with the following stanza: “Turning and turning in the widening gyre, the falcon cannot hear the falconer, things fall apart; the centre cannot hold; mere anarchy is loosed upon the world.”
Many of the international independent companies could be seen reshuffling their management to become more agile, and pressure from activist stakeholders forcing companies to eliminate “ muda” known as waste or face “hara-kiri” will be a highly noticeable trend in 2015.
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