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04/03/2016

Insolvency risk in the oil & gas sector

Guest post: Phillip Sykes, R3 President

The distress in the oil and gas market has been well publicised. The price of oil has fallen dramatically in the last eighteen months, now standing around $35 a barrel.

 In recent years the number of corporate insolvencies in the sector has been low across England, Scotland and Wales. In 2012 there was only one, rising to six in 2013 and falling to three in 2014.  Last year, there were seven in the first three quarters, the figures for the final quarter are yet to be released but will be telling.
 
The final year results will likely show an even further increase, but the numbers still aren’t exorbitant.
 
While oil and gas companies may be in significant distress, rather than entering a formal insolvency procedure, many are currently choosing to explore their options by opting to restructure.
 
According to R3’s insolvency risk tracker, based on Bureau van Dijk’s ‘FAME’ database of company information, 26% of businesses in the sector are currently at higher than normal risk of entering insolvency in the next 12 months. While there has been a five percent increase in the proportion at risk this month, it still doesn’t represent a particularly high level. The figure is in line with the cross-sector figure for the UK.
 
At current prices, extraction from new reserves is not viable from most oil and gas businesses, so extraction of existing reserves is the only ongoing activity.  Going forward, this will have an impact on the availability of new infrastructure, R&D and supply chain contracts.
 
It may be that the official statistics so far aren’t reflecting the degree of distress present in the industry, but there are indicators of the wider impact it’s having.
 
In Scotland, where the oil and gas industry is of central economic importance, particularly in the North East, there have already been notable consequences. Aberdeenshire and Aberdeen Councils have seen 58% and 59% increases in unemployment rates respectively in 2015. These are two of only five councils, out of 400 across the UK, not to have seen an increase in employment last year.
 
A number of sectors will be feeling the impact of this downturn, including the hospitality industry which will have noticed fewer people making trips to the area. According to the Hotel Price Index, the average price paid for a hotel room per night in Aberdeen fell by 25% last year, the biggest decrease of all the 40 cities tracked. The prices in Edinburgh (2%) also dropped.
 
This knock-on effect will be replicated across a range of support service industries, such as engineering and transport, which provide goods and services to the oil and gas sector.
 
It’s clear that the sector is undergoing a period of intense distress and transition. Many oil and gas companies will be seeking professional advice about how best to cut costs. While unfortunately there have already been numerous job loss announcements, hopefully restructuring can minimise the impact. The statistics for corporate insolvencies in the last three months of 2015 will be released in April and can shed further light on the condition of the industry.
 
Guest post by R3 President, Phillip Sykes 
 

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.