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Just like many other industries, the COVID-19 pandemic has been highly detrimental to the oil and gas sector across the world. Whilst consumers have certainly benefited somewhat from the global fall in oil prices since April 2020, many oil giants appear set to file for bankruptcy – or at least engage in radical restructuring. Already since June, the likes of Diamond Offshore, Whiting Petroleum and Ultra Petroleum have publicly announced their intentions to restructure their finances, whilst companies such as FTS International and Oasis Petroleum have declared that they are preparing Chapter 11 filings (i.e. the U.S. legal framework for planning a reorganization of a business to retain its life and repay its creditors).
What are the implications of this for clients here in the UK – especially those with investments or pensions with a stake in the stock market? In this article, our financial advisers here at Cedar House offer some answers to these questions at the time of writing, in July 2020.
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What’s happening to oil & gas?
One thing you’ll likely have noticed during the UK lockdown is the lower cost of fuel. Due to fewer people on the roads and a huge reduction in air passengers (byproducts of nationwide quarantine), global supply has outstripped demand – resulting in lots of spare oil, which global oil giants are trying to sell for less. This reduction in gas prices has naturally eaten massively into many of these companies’ profits, resulting in some announcing bankruptcy or restructuring.
The extent of the financial damage to the oil industry cannot be overstated. The U.S. champion of fracking, Oklahoma-based Chesapeake Energy, for instance, has at least $9b in long-term debt to repay and filed for bankruptcy on the 28th of June. British Petroleum (BP) has also said that 10,000 jobs (i.e. 1/7 of its staff) will be axed worldwide in an attempt to stabilise its business in the wake of falling oil prices. Here, BP has stated that it is seeking to save $2.5 billion (£1.9b) in the upcoming financial year, and that the cuts “Will likely have to go even further”.
What are the implications?
Whilst some might welcome the above news from an environmental perspective (i.e. fewer oil companies and less consumption mean lower carbon emissions), industry workers’ finances will naturally be badly hit if they lose their jobs. At a higher level, moreover, the potential effects on the global economy could be highly detrimental. Analysts at oil consultancy Rystad, for instance, estimates that as many as 73 international oil companies could go under in 2020 due to the pandemic, with at least another 150 “at-risk” in 2021.
Admittedly, many of these companies are entering their second restructuring within the past 5 years (e.g. after the 2016 oil price plunge). The industry broadly weathered that price crash, so couldn’t the same be said for the present situation? The key difference and difficultly this time, however, is that current financial tools cannot confidently assign value to what the oil price will reasonably be expected, 12-36 months from July 2020. What will the situation with COVID-19 be at these times around the world, and how will this affect oil and gas? We just don’t know.
How all of this could affect the stock markets and global economy in the short and medium-term, moreover, is also unclear at this time. Although investors will crave certain answers, this lack of clarity should reinforce the need to commit to a long-term investment horizon and to diversify appropriately, following counsel from your financial adviser.
If large numbers of oil companies go out of business, then 100,000s of lost jobs in oil-exporting countries (e.g. Russia) would represent a blow to these national economies. Tax revenues for funding of public spending would likely to go down as a result, leading to less money to support people on benefits and growing levels of government debt. Exporters with large foreign currency reserves (e.g. the UAE and Saudi Arabia) might be somewhat less-badly hit in the short term by a fall in oil prices since they can cushion themselves more readily.
For countries which largely import oil (e.g. Japan, India and Germany), there might be some benefit from lower oil prices. Yet the impact upon renewable energy innovation in places such as Europe could be negative, as prolonged periods of cheaper gas could incentivise investors to stick with oil rather than investing in green energy (e.g. electric cars).
As the UK economy reopens in the wake of ease in lockdown, we at Cedar House suggest that clients take advantage of the cheaper fuel prices currently on offer! For those with equity and/or bond investments in the oil and gas industry, we recommend speaking to your financial adviser about the best options ahead for your portfolio.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or firstname.lastname@example.org.