The impact of COVID-19 on the oil and gas industry has already been profound, with major oil companies announcing steep cuts in capital and oil prices plunging into negative territory for the first time in U.S. history. However, the full implications are only just beginning to unfold.
Right now, oil and gas companies are struggling to navigate the economic crisis created by the pandemic and governments’ responses. The next wave to prepare for is the longer-term impacts, which will be dictated by the decisions policymakers and companies make over the coming months. So, the big question is: what will the long-term impact of the coronavirus be on the oil and gas industry?
While it is still too early to predict the precise effects, there are a few outcomes that are already beginning to emerge. Here are a few potential long-term consequences your oil and gas company should keep an eye on:
Cuts in Capital Spending by Upstream Oil and Gas Producers
The collapse in oil prices driven by the slump in demand because of the coronavirus has led major oil companies, including Royal Dutch, Shell, and Chevron, to announce steep cuts in capital spending for this year (20%). At the end of March, BP shared that it would cut its 2020 spending plan by 25 percent and reduce output from its U.S. shale oil and gas business. Likewise, Occidental Petroleum slashed its capital spending budget for the year by 47 percent. Investors say what happens next depends on how long the current crisis lasts. If the situation is prolonged, the cuts may not be sufficient enough to allow these companies to maintain dividends without adding to their already elevated levels of debt.
Large Projects Delays and Cancellations
While much is still unknowable, it is safe to say that the recent capital spending cuts will have a direct impact on production growth that will be felt years from now. Already, several major upcoming pipeline projects (e.g. Liberty Oil and Red Oak) have stalled after additional capital spending was suspended for the projects. Other U.S. pipeline operators are also either stalling or delaying their projects. Travel restrictions have impacted the meetings and conferences that make investment deals possible, which will also reduce the number of projects that receive the green light this year. Some of these large projects would have added approximately 1.8 million BOPD by the mid-2020s. However, the recent delays and cancellations mean 90 percent of that production will be pushed back – or not take place at all.
Remote Working Could Be Here to Stay
In early March, oil giants set health checks for critical on-site teams and group workers and imposed work-from-home rules for office staff. BP, Exxon Mobil, Kinder Morgan, and Royal Dutch Shell are just a few of the major companies that gave workers work-at-home assignments as coronavirus spread and threatened the industry. Even before the pandemic swept the nation, remote work was accelerating in the U.S. Now that companies are making investments to put remote work solutions and security in place, experts believe they will be much more likely to keep it when the COVID-19 threat subsides and the economy is back to full force. While remote work is not feasible for much of the oil and gas industry, time will tell if oil companies will continue to offer the option for those who are able to take advantage of it.
A Wave of Oil Bankruptcies and Acquisitions
The most vulnerable oil and gas companies during these uncertain times are the ones that have piled on too much debt and are unable to generate enough cash flow to cover interest payments. As companies face mounting debt maturities, many will be forced to file for bankruptcy. In addition, oil companies that were already struggling before the pandemic will likely have to consider selling assets to major oil players with stronger balance sheets that are able to take advantage of the situation. For many oil and gas companies, the determining factor will be how long oil prices stay down. If a rebound takes place soon enough, it could save many oil companies from bankruptcy.
Is your oil and gas company one of the many experiencing tightening access to capital? Capital that you need to boost cash flow and manage these uncertain times the oil and gas industry faces? If so, you should consider the many benefits of an alternative funding option like oilfield factoring.
Secure Quick Access to Capital with Invoice Factoring
When it comes to oil and gas factoring, no one knows the U.S. oilfield industry like Security Business Capital. Located in the heart of the Permian Basin, SBC has built an experienced and dedicated team of individuals with years of expertise in providing flexible cash flow solutions. Our oilfield factoring services allow your business to use unpaid invoices to generate cash in as little as 24 hours – without adding a burden of debt.
You can then use these funds to cover daily costs, manage unexpected expenses, invest in technology, purchase new equipment, and boost and maintain cash flow. Whether your business engages in oilfield hauling, pipeline construction, drilling, welding, exploration services, or any other facet of the oil and gas industry, oilfield factoring can help.
If you would like to learn more about how our invoice factoring services work, contact us today for a free quote or consultation.