Insolvencies of UK oil and gas service companies are up by 55% in a year

The number of insolvencies of UK oil and gas service companies rose 55% in the last year to 28, up from 18 in 2014*.

The increase in insolvencies is an almost inevitable result of the cancellation of dozens of new oil and gas projects and from increasingly competitive pricing in the oil and gas service sector for those contracts that do come up for tender.

As crude prices tumbled, oil companies have been forced to cancel projects worth an estimated $200 billion in total – around 80 major projects worldwide – over the last year. In 2010, just four oil and gas service companies went insolvent.

UK-based oil and gas service companies are likely to be feeling the pain, both from the sharp reduction in exploration and production projects and from oil and gas companies asking their suppliers for better terms.

Oil prices are currently at a record low since the financial crisis in 2008 and even though they have fallen from $120 to below $30 a barrel, very few analysts are expecting a substantial recovery in oil prices for some time to come.

Jeremy Willmont, Head of Restructuring & Insolvency, says: “Oil and gas service companies expanded their businesses over the last decade based on an oil price well above the current one.

“The pain caused by the oil price fall has translated into a rising tide of financial distress across the sector.

“Banks have begun to reduce new lending to the sector due to the weakening fundamentals of some oil and gas service companies. We would also expect more oil and gas service companies to breach their covenants on their existing loans leading to more insolvencies in the next year.

“UK oil and gas service companies frequently work on a global basis but unfortunately projects are being cancelled across all parts of the energy sector, from LNG in Australia to fracking in the Appalachians.”

Cuts to headcounts are also being implemented in UK oil and gas majors, with an estimated 15% reduction in jobs since the beginning of 2014. Royal Dutch Shell has recently announced that it expects to cut around 2,800 jobs, around 3% of the total company. BP will cut 4,000 jobs out of a global workforce of 80,000.

Jeremy Willmont adds: “Oil prices are currently not expected to recover substantially and are expected to stay weak in 2016. Some commentators believe there is still a long way fall. With such an uncertainty in oil prices and little signs of improvement, it seems that the sector will have to hunker down and deal with these very tough trading conditions for some time to come.”

The number of oil and gas service company insolvencies in the last five years

*12 months to 30 September
Source: Analysis of Companies House data