UK oil and gas companies’ profit warnings soar in 2020

Matthew Farmer 6 August 2020 (Last Updated August 6th, 2020 17:47)

UK-based oil and gas companies issued more profit warnings between April and June than in the whole of 2019, according to analyst firm EY.

UK oil and gas companies’ profit warnings soar in 2020
UK oil and gas operators are facing the possibility of peak oil after years of profitability worries. Credit: BP.

UK-based oil and gas companies issued more profit warnings between April and June than in the whole of 2019, according to analyst firm EY.

In the second quarter of this year, FTSE-listed oil and gas companies issued 10 profit warnings compared with seven throughout the whole of 2019, and only one issued in the first six months.

Oil and gas businesses have made 14 profit warnings since January, 11 of which were attributed to the effects of Covid-19. This represents 79% of industry profit warnings, close to the 84% average for all UK industries.

Disruption from the coronavirus pandemic has caused significant changes across all the sector. The number of issued profit warnings in the UK over the first three months of 2020 increased to approximately four times what it was in the three months before.

Profit warnings, peak oil and the pandemic

EY global oilfield services leader Celine Delacroix said: “The biggest short-term issue for the oil and gas sector is the sharp drop in demand and in oil prices, triggered by the Covid-19 pandemic. While dealing with rapid decreases in the oil price isn’t new to oil companies, the root cause this time is more complex and the outlook more uncertain than ever.

“We may have already passed ‘peak oil’ and the sector is radically rethinking both its short and long-term outlook. It’s this combination of low prices and exceptionally high levels of uncertainty that has led to significant Capex cuts and widespread write-downs.”

Over the second quarter, industry figures have increasingly suggested that peak oil may have passed. The infamous “peak oil” event is the supposed turning point for oil extraction when the cost to extract exceeds the price, after which production will never recover to the same levels.

BP CEO Bernard Looney was among the first to mention the possibility of peak oil in an interview with the Financial Times. In the US, Parsley Energy CEO Matt Gallagher believes the country has passed peak oil, but most in the country disagree. Italian producer Eni has stated it expects its production to peak in 2025.

Officials involved with OPEC have reassessed their outlooks on the future of the industry, Reuters reported citing multiple inside sources. One official said: “The main concern is that oil demand will peak in the next few years due to rapid technological advances, especially in car batteries.”

“For some, the next few months will be about survival”

In its findings, EY highlighted how low profitability had caused problems for the oilfield services sector even before the pandemic. As companies cut their spending, more services companies will face difficulties.

Delacroix added: “For some, the next few months will be about survival and their priorities will be cutting costs and raising capital before debt markets tighten even further.

“Consolidation within oilfield services is inevitable. The companies that drive forward with mergers and acquisitions and embrace diversification to be cleaner and greener are the ones most likely to secure a positive, long-term future.”

Much of the UK industry operates in the North Sea, using the city of Aberdeen as a hub. This week, local authorities reapplied restrictions to businesses and travel after an outbreak of Covid-19.

EY director of strategy and transactions Chris Durling works in Aberdeen. He said: “The oil and gas industry, particularly in Aberdeen, has an enviable track record of developing innovative, digital and transformative businesses, that have proven their resilience through multiple sector challenges.

“This is likely to prove highly valuable as the sector pivots once more, to embrace a greater focus on sustainability, efficiency and a more diversified energy mix. Greener credentials are already driving premiums for shareholders who are fundraising or contemplating exit and in the current low oil-price environment, it is vital companies make themselves attractive to investors.”