16 UK oil and gas companies* became insolvent last year, up from two the year before, as the oil price slump bites.
Despite the recent announcement made by OPEC, the slump in the price of oil from $120 to just under $50 per barrel for most of the past year has continued to drag businesses across the sector into insolvency. Only nine UK oil and gas companies went insolvent in total, in the preceding four years (see graph).
Oil and gas sector insolvencies have increased around the world ever since the slump in oil prices, but those smaller North Sea operators face particular stresses.
Hedging strategies had delayed the impact of falling oil and gas prices for some producers over the last few years, by guaranteeing them higher prices, but many of those contracts have now expired.
Oil and gas companies are also having problems refinancing loans as they come up for renewal as banks look to cut their exposure to the struggling sector. Banks are also negotiating with some companies over an increase in the interest rate they pay on a loan or for one off payments to compensate the bank where a loan covenant has been breached because of the fall in oil and gas prices.
Jeremy Willmont, Head of Restructuring & Insolvency says: “The collapse of the price of oil has stretched many UK independents to breaking point.
“The last 15 years has seen a large increase in the number of UK oil and gas independents exploring and producing everywhere from Iraq to the Falkland Islands. Unless there is a consistent upward trend in the oil price, conditions will remain tough for many of those and insolvencies may continue.”
Michael Simms, oil and gas Partner, says: “North Sea oil producers face further headwinds from decommissioning costs of offshore rigs – that’s a very significant headache for companies that are already financially strained.
“North Sea projects are also lagging behind in terms of attracting capital investment. The relatively stable political environment that North Sea investment benefits from is offset by the higher costs of production.”
The spike in insolvencies is not unique to the UK – in North America, 90 oil and gas companies have filed for bankruptcy since the beginning of 2015, 48 since January 2016.**
There are risks involved for purchasers of the business of oil and gas companies that go into insolvency. For example, approval may be needed from the relevant government if licenses are to be transferred to a purchaser; and decommissioning costs might also be inherited by the purchaser of assets held by an insolvent company.
No. of Oil and Gas Insolvencies hits new high
*Previous research from Moore Stephens had also identified the sharp rise in oil & gas services companies.
**Haynes and Boone LLP- until end of July.