Oil price pressure takes another chunk off UK oil services firms

Pressure on UK oil firms from the persisting slide in crude prices was underlined on Monday by a spate of significant falls in stocks of small and medium-sized oil exploration & production services firms.

This latest rout is being led by oil and gas producer Afren Plc., which traded 24% lower having been down 26% earlier after the firm slashed resource estimates for its Barda Rash oilfield in Iraqi Kurdistan.

It also said it was exploring options for the asset.

Shares of oil-rig builder Lamprell Plc. traded 15% lower after it said cheapening oil prices were undercutting its ability to secure new business and it expected revenues for its current fiscal year to be about 10% below market expectations.

The stock of oil and gas equipment supplier Hunting Plc. slumped more than 10% at its worst today, to its lowest level in more than 5 years, making it the worst performer in the broad  Europe-focused Stoxx 600 index.

Major oil services firms Petrofac Ltd., and John Wood Group Plc., traded around 4% to 6% lower during the session.

Afren, Petrofac troubles mount

For many of these firms, the latest damage from the six-month oil price collapse is just one aspect of major troubles they have been beset by, with the crude oil rout simply exposing and exacerbating their existing woes further.

In the case of Afren, its stock had already displayed sharp dips since January of last year, amid turmoil in its C-Suite that culminated in the sacking of its CEO, chief operating officer and two associate directors on 7th November, after an independent review into unauthorised payments found evidence of “gross misconduct”.

As for Petrofac, it warned investors on 24th November that its North Sea projects were facing a “difficult period” even beyond oil price weakness and that this would slash $500m off its net profit for the 2015 fiscal year, a 25% cut compared to analysts’ consensus forecasts which were expecting $675m.

It was Petrofac’s third profit warning during 2014.

It’s worth noting that many of the firms in these segments have faced severe issues for several months and any significant short selling may have come and gone.

Short interest in Lamprell, Wood Group and Afren was judged on Monday by data provider Markit to be ‘low’.

Drilling into deep indebtedness

Even so, it’s clear that as the nose dive of oil prices edges towards 60% compared to highs in the middle of last year, almost all exploration & production sector firms (most of which will be small-to-medium-sized companies) logically become riskier bets, based on profitability.

Financial risk management data provider, companywatch.net reported in December that according to its calculations, oil prices had fallen so deeply, 70% of all E&P firms would now be unprofitable.

Furthermore, the precipitous oil price drop is raising energy companies’ borrowing costs, reducing the amount they can borrow or pricing them out of the market altogether.

It could become difficult for some companies to meet covenants on existing loans and prompt lead banks to ask for extra protection on future deals.

Under these circumstances, the indebtedness of oil firms—perhaps particularly, mid-sized oil services and equipment firms—has become a central issue for investors in these sectors to scrutinise.

Assessments of net-debt-to-equity ratios of a closely matched set of European oil services and equipment firms immediately reveals Hunting as the worst performing on this metric, with its net indebtedness capable of engulfing the value of its equity almost 15x, one reason why its share price fall on Monday is amongst the deepest of its peers.

Wood Group was amongst the firms with the strongest balance sheet, judging by this measurement, with a net debt/equity ratio a little over 0.1x.

This may be providing a relative buffer for its share price which traded a relatively contained 5.5% lower at the time of writing.

Further advantages for Wood Group and a few other oil services firms, like its larger rival, Amec Foster Wheeler Plc., may stem from a particular aspect of their contract structures which make their order books ‘reimbursable’ to a great extent.

In its December trading update the firm said it expected its business to be resilient relative to its sector in 2015 helped by reimbursable orders.

Wood said it anticipated full-year 2014 performance to be higher than last year’s and in line with expectations.

European oil services firms’ net debt/equity, last 12 months

Data compiled by Thomson Reuters