Take a minute, and think about the exploration and production companies in this sliding oil price scenario. The E & P sectors fortunes rise and fall with the oil prices. The oil and gas giants around the world have enjoyed years when crude oil was more or less stable. However, with the price of oil down more than 50 per cent since June 2014, gazes are now moving on how the crash in prices will play out among corporates in the oil and gas sector worldwide.
More than ever before, the energy companies are facing severe pressure on their finances. Analysts from around the world and credit rating agencies have not been too sanguine about any kind of investment pouring in response to falling commodity prices as the firms cutback on capital expenditures.
In its recent research, Moodys - one of the largest global credit rating agencies - has informed that exploration and production (E&P) companies will be taking the first hit as the global oil and gas industry enters a challenging 2015. Already, many E&P firms in the oil producing countries have announced steep cuts in their capital spending. It has warned, If oil prices remain at around $55 a barrel through 2015, most of the lost revenue will hit the E&P companies bottom line, which will reduce cash flow available for reinvestment.
The impact of falling crude oil prices is not limited to the oil and gas E&P firms; as reduction in capex will lead to a decline in supply, production capacity, development and exploration activities, decrease in capital spending by the E&P companies is likely to have a domino effect on other sector-related industries like midstream operations and oilfield services like the Schlumbergers, and the Halliburtons.
Total crude oil production in Pakistan averaged at 93.7kbpd in CY14, up by 16% year-on-year, owing to new discoveries as well as the beginning of production from various development projects. However, the case for E&P companies in Pakistan is the same as the rest of the world. Where oil production is bracing new highs, the steep decline in oil prices is likely to have a negative impact on the earning and spending capabilities of the E&P firms.
The market believes that the domestic oil volumes will continue to surge, however, the positives will be neutralised by the negatives of the thrashing oil prices. As for the investment in the oil and gas sector marred by security issues and policy slippages, it would not be a surprise to see a further decline in investor sentiments owing to lukewarm crude oil prices worldwide.