After Brent crude dipped below $40 per barrel, do we have anything to fear from lower oil prices for longer?
James Butterfill is head of research & investment strategy at ETF Securities, says Yes
The risk with a lower oil price lies in its combination with Fed/Bank of England rate rises. Loan delinquencies in the energy sector are likely to rise as rates go up. The most recent oil and gas survey from IHS highlighted write-downs totalling $60bn to end-June. While this is significant, dividends in the sector have further scope to be cut before balance sheets look untenable, hurting investors. The government is feeling the effects too. In the last financial year, total oil and gas tax revenues fell by 54 per cent. Given further declines in oil prices, we expect further compression of oil and gas tax revenue. Falling tax revenue compromises the government’s spending plans and makes it more reliant on issuing debt. Furthermore, employment in the UK oil and gas industry has fallen 15 per cent since the beginning of 2014. It’s also bad for the environment. Since the rout in oil prices, the average mile-per-gallon of cars purchased in the US has fallen for the first time in seven years.
Ben Higson is partner and head of Hogan Lovell’s London corporate practice, says No
The prolonged period of depressed commodity prices has caused indigestion in M&A activity and hit oil company share prices. But with crude oil slipping below $40 per barrel this week, there seems to be a consensus that low oil prices are the new normal – and this will give some certainty after a period of volatility. Coupled with the cycle of portfolio churning taking place, this will lead oil firms to start thinking about consolidation, diversifying risk and reducing costs across different levels of development within their portfolio. I also expect more distressed assets to become available as banks, which have so far tended to “lend and extend” credit to oil companies, begin to put pressure on them, affecting the full value chain. In particular, oilfield services – which are highly dependent on oil companies continuing to explore, extract and refine oil – will be ripe for consolidation. For cash-rich oil companies, this is an opportunity to buy future reserves and take advantage of distressed situations. So, with low oil prices comes greater certainty about the future.