London Oil & Gas Community Reels from Oil Price Collapse
The collapse in oil prices over the past few days has left the oil market facing a crisis of both supply and demand, as the negative economic impact of the Coronavirus pandemic continues to spread globally. Saudi Arabia’s move over the past weekend to launch an all-out price war after Russia’s refusal to cooperate on production cuts with OPEC sent the price of Brent crude futures for May settlement crashing to a 4-year low of US$34.36 per barrel on Monday.
The start of the week also witnessed major turmoil in global financial markets, with London’s FTSE 100 index, which includes oil majors such as BP and Royal Dutch Shell as major constituents, registering a near 8% single-day drop on Monday. The broader FTSE 350 Supersector Oil & Gas Index dropped nearly 19%, with several independent producers that constitute part of the index suffering a 20% to 50% collapse in their share price. Worst hit were Premier Oil, Tullow, Rockhopper Exploration, Cairn Energy, Hurricane Energy, and EnQuest, some of whom are now likely to face existential threat due to their existing high leverage and likely inability to service debt payments in a protracted low oil price scenario.
In response to the oil price drop, the UK’s Oil & Gas Authority (OGA) announced on Tuesday that it has halted its licensing rounds for offshore exploration acreage in the North Sea at least until next year. Other planned E&P projects in the North Sea are now at risk of becoming uncommercial at current oil prices, whereas projects already under development might suffer delays due to a lack of access to capital as the London-based investment and lending community shies away from any further exposure to the sector in the near-term.
The worst-hit companies, especially those among the AIM-listed small and mid-cap universe, will now be hard-pressed to seek fresh capital infusions, whilst continuing to cut costs and dispose of assets. In the absence of being able to raise investor capital, outright sales to or mergers with better-capitalized peers are inevitable. Such distress-driven deals are likely to result in a significant uptick in M&A activity through the second and third quarters of 2020.