DW: Will 2016 be a return to ‘lean and mean’?

In today’s DW Monday report, Douglas-Westwood comments that, by all accounts, 2016 is shaping up to be just as challenging as 2015. So, where does this uncertainty leave the industry and what lies ahead?

Spending and headcounts have been slashed across the industry and the specter of bankruptcy is an all too common concern. Recent trends in commodity prices have not helped. Late December saw Moody’s downgrade its price forecast for 2016 by 17% and a further dip in the price of oil – Brent falling to the lowest level since 2004. Producers have continued to produce, and new Iranian output may result in even more oversupply.

If prices remain low, DW says that one thing is clear – 2016 is lined up to be a year of consolidation. Cost savings are required to ensure that future developments are economically viable. Project optimization and supply chain improvements will be key in reducing costs. However, at current prices, industry consolidation will play a large part in ensuring the cost-effective development of projects.

In all likelihood, 2016 will see the completion of two blockbuster exploration and production (E&P) and oilfield services (OFS) deals – with Shell and Halliburton acquiring BG Group and Baker Hughes, respectively. Further merger and acquisition (M&A) activity is expected – those with strong balance sheets are in line to benefit from a wealth of distressed assets. DW says that this is particularly clear in the drilling sector – since 2014’s drop, firms have relied on credit markets to keep rigs going. With prices below $40, this option will dry up, forcing a search for partners. This year may prove to be a difficult year for all involved. Yet, for those that are well positioned, DW believes there is likely to be a plethora of opportunities. 

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