For years, the oil industry was associated with profitability and stability. However, this market has recently experienced an economic slump with no sign of recovery. The final quarter of 2015 is already shaping up to be the worst since profitability began to decline.
Oil prices were cut in half in June of 2014, marking the start of a downturn for the oil industry. Some of the world’s top oil companies were thought to be unshakable, but are now trembling in the aftermath and struggling to get back on their feet. In an effort to restore their companies, spending has been cut, thousands of jobs have been lost and major projects have been totally abandoned.
Shell, in particular, showed a major deficit after third quarter earnings were revealed. As a result of the economic downturn, the major corporation lost $7.4 billion – a result of being forced to scrap an $8.2 billion project in Alaska’s Arctic Sea.
This is their biggest loss in more than a decade, and this sounds familiar for companies all over the world. Rig count is falling as oil companies are unable to meet their production quotas. According to a third quarter report, there were only 838 oil rigs in the United States during the final week of September, which was four less than the week before and the lowest number since 2003. It’s also a little less than half the number of rigs that were operating at the same time last year.
As companies work to claw their way out of this major oil recession, drastic measures are being taken. Jason Gammel, a Jefferies oil and gas equities analyst, explained to Economic Times “The sector is rapidly moving into the red. It is slowly going to claw its way back into the black through cost-reduction efforts, but that will take time. It will depend on price movements, but it will take time to get all these cost savings through the system.”
He also explained that European oil companies will need to get at least $76 per barrel in order to break even, but the expected rate for crude oil in 2016 is much less, coming in around $58.60 a barrel. As a result, corporations such as Shell will be forced to cut even more jobs, following the 6,500 jobs that were already cut earlier this year.
Relying on Debt
The debt market has been one of the only viable options for oil companies currently in the red. The debt ratio is relatively low with banks more willing to lend, and companies are taking advantage of that in order to cover spending and dividend payments. For some companies, this option is saving them from cutting jobs and abandoning projects. But the majority of companies are forced to do both.
This reliance on the debt market is a clear indication that the economy is turning for the worse. The debt ratio is low now and banks are finally willing to lend money again, but if the oil industry can’t get back on its feet in the near future, it could lead to another bank collapse.
The final quarter of 2015 isn’t looking good for the oil industry, nor are the predictions for 2016, as domestic and overseas oil companies continue to struggle – looking for bailouts wherever possible.