Oil price slump is ‘nightmare before Christmas’ – KPMG

KPMG says some companies are running out of options other than shutting down oil fields earlier than planned, or being sold at low valuations.

Aberdeen-based oil services Wood Group said it was looking for businesses to acquire.

This week the price of a barrel of Brent crude fell for three consecutive days of trading to slump to just over a third of its value 18 months ago.

In a commentary on the state of the sector, KPMG’s head of oil and gas, Mark Andrews, said companies with cashflow constraints or big debts “are concluding that weathering the storm of low prices may not be possible for the length of time now forecast”.

He added: “They are now considering mergers and acquisitions at valuations closer to those of buyers, who have until recently kept their powder dry, and we therefore expect an increase in deal flow across the sector.”

He said the expectation that the price will be “lower for longer” is stretching into 2016, and making companies less willing or able to operate high-cost fields.

“They may be closed down earlier than planned, with a rise in decommissioning work to follow,” said Mr Andrews, describing the industry outlook as “the nightmare before Christmas”.

“The impact could be a domino effect, raising the very real possibility of significant resources being left in the ground, as the cost of maintaining ageing infrastructure mounts for certain mature, late-life assets.”

Although signalling an intention to buy assets, the Wood Group trading update reflected its challenges in adjusting to less spending and lower investment by its oil producing clients.

Its engineering division has fewer orders on its books than it is used to at this stage, due to lower spending on upstream and subsea developments.

In the North American market, Wood Group’s PSN division faces pressures to reduce prices, along with fewer orders being placed.

The North Sea is seeing similar trends, and the change from two to three-week offshore worker rotations has lowered the number on the payroll.

“We remain focused on cost leadership and customer alignment in this mature basin,” said the Aberdeen management.

In Turbine Activities, the oil and gas downturn is affecting the flow of work, while there has been “very disappointing” performance in its power station division, EthosEnergy.

The statement gave a warning that the valuation of that part of the company will be reduced, having an impact on the full-year accounts.

The Aberdeen company has made several acquisitions of companies during this year, intended to expand its current activities.

These include a £100m purchase of The Infinity Group in the USA, a construction and maintenance provider to the gas processing and power sectors.

“Our strong balance sheet allows us to reinvest productively in the business, supporting our continued investment in acquisitions and organic growth,” Wood Group said.

Its share price rose by 4 per cent following publication of the statement.

Oil and Gas UK, the trade association, on Thursday launched its charter for member businesses to commit to co-operation and collaboration to improve efficiency.

Sir Ian Wood, who built up Wood Group and more recently authored a report into measures needed to maximise production in the UK offshore sector, commented in support of the Industry Behaviours Charter.

“Achieving the essential collaboration requires a change in behaviours both between operators and also with the supply chain. The good thing is the charter goes well beyond the obvious headlines and identifies some of the key areas of behaviour that will require changing - indeed are beginning to change,” he said.

Meanwhile, Bank of England rate-setters cited the languishing global oil prices, as well as slower domestic wage growth, as they again voted to keep interest rates at a record low of 0.5 per cent.

The minutes of the Bank’s latest policy meeting showed it was in no hurry to match an expected rate rise next week by the US Federal Reserve.

Governor Mark Carney and other Monetary Policy Committee (MPC) members said the “material news” in the month since they last met was that the price of oil had “fallen markedly again”, which would likely see inflation stay subdued.

They also highlighted a levelling off in wage growth in Britain, something that is central to the Bank’s deliberations on when interest rates need to rise.

“Despite lower unemployment, nominal pay growth appears to have flattened off recently,” the minutes said.

The document suggested the slowdown could be a blip in the numbers, or the result of people working fewer hours.

It may also be a reflection of employers offering lower wage deals because of low inflation. As in recent meetings,

Ian McCafferty was the only member of the nineperson MPC who voted to raise rates to 0.75 per cent.