The collapse in oil prices has tested exploration and production companies like never before. Around $200bn of capex projects have been cancelled, according to a report by Wood Mackenzie, and since March at least six oil companies have filed for bankruptcy.
A report issued by Goldman Sachs recently ranked 28 businesses by the strength of their assets and balance sheets. It found 11 to have such weak balance sheets they are at risk of “potential distress or alternative capital needs”. A further eight have poor balance sheets but better quality assets, which could make them potential M&A targets.
For the rest of the industry, the crunch could come in September when investment banks make the next of their periodic assessments of oil company reserves.
In the meantime, investor sentiment towards oil company stocks and bonds remains very negative.
“The relative valuation of the US energy sector has only been this low on two occasions in the past 30 years,” explains Nicole Decker of UBS. Both times oil was close to $10 barrel, in December 1998 and November 1988.
As a snapshot, shares in the companies ranked as weakest in Goldman’s research have fallen markedly. Approach Resources has fallen 33 per cent year to date, EXCO Resources is down 66 per cent, and Goodrich Petroleum has shed 78 per cent.