The oil sector could reduce by a third, as cost-cutting won’t be enough for many companies to survive low oil prices, according to a report out today from EY.
“Consolidation is inevitable,” as companies need more than the 20-30 per cent cost-cutting already delivered for the long-term, according to EY, which predicts that oil prices will stay low beyond 2020, and won’t rise much above $70 a barrel.
EY says it will mainly be oilfield service providers and contractors affected, such as engineers and parts manufacturers, although industry commentators have also pointed to consolidation among smaller exploration and production companies, combining to pool resources.
Access to new technologies, markets, and of course, massive savings and efficiency pushes, will drive the M&A, which could see the number of companies in the highly fragmented sector reduce from 1,500 to 1,000.
However, it’s not necessarily bad news, report co-author and EY director Tim Bunnell told City A.M.: “It’s no bad thing for companies to reassess and look at the value of contracts, looking for sustainable, flexible cost-bases. [They could] come out of this nimbler.”
He said the wider UK oil sector would also benefit from increased standardisation as it consolidated.
The market offers rich pickings for private equity firms and sovereign wealth funds to invest in, with Burnell pointing to attractive multiples that have already attracted the likes of Carlyle and KKR.
The FTSE has been dragged down by British engineering firms hit by their high exposure to the global oil slowdown. Weir group, which makes valves and pumps was demoted from the FTSE 100 earlier this year.