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  • Diversification gives majors resilience to withstand fluctuations in crude oil prices
  • New financing approaches share risks between producers and investors
  • Oil companies are working to lower their breakeven costs


  • High debt levels, especially among unconventional oil companies
  • High volatility in crude oil prices
  • Overcapacity of companies in the oil & gas services segment

Risk Analysis

Risk Assessment

Crude oil prices are facing slower demand, while supply remains strong. Given the imbalance in favour of supply in this market, Coface is forecasting an average crude price of USD 60 per barrel in 2020. This price level is too low for exploration companies to generate significant cash flows. This in turn impacts the entire supply chain, as low investment spending then destabilizes oil & gas services companies, which are already burdened by overcapacity. Financially struggling oil & gas services companies are at the greatest risk in the sector. Refineries have to deal with new standards while also facing sluggish demand. As a result, overall risks are increasing for companies in the sector, as reflected in Coface’s sector risk assessments. Of the six regions in the world for which Coface produces sector risk assessments of the energy sector, none is rated low risk and half of them have high-risk sector risk assessment. In North America in particular, unconventional firms must now demonstrate that their business is sustainable. They are operating in a region of which the energy sector has been vibrant in recent years, with the United States moving towards energy independence.

Energy EN
Sector Economic Insights
Oil and natural gas production is expected to remain dynamic despite gloomy global economic conditions

Coface expects global economic growth to slow to 2.5% in 2019 and 2.4% in 2020 from 3.2% in 2018, mainly due to the impact of trade tensions between China and the United States, which are stoking uncertainty, affecting global value chains and undermining household and business confidence.

Coface estimates that the average annual price of Brent crude oil will be USD 60 per barrel in 2020, owing to sluggish demand from China and India, and difficulties in client industries such as petrochemicals. Average monthly Brent prices dropped by 14% at the end of July 2019 compared to the end of December 2018 (USD 64.07 compared to USD 74.11), despite the persistence of a number of factors that could have led to a decline in prices, including a tense geopolitical situation in the Middle East and North Africa, reduced production of OPEC+ countries under the current agreement, as well as the impact of US sanctions on Iranian and Venezuelan output.

Consequently, the main reasons for the downward pressure on oil prices were the global economic slowdown, as well as new standards to reduce hydrocarbon consumption and prevent environmental risks. These standards have impacted a number of client sectors, such as automotive, shipping and chemicals (especially the petrochemical industry segment). The net margin of the world’s leading petrochemical companies fell by 127 basis points between Q2 2018 and Q2 2019 (from 9.52 to 8.25) due to the new standards.

Paradoxically, global production is set to increase due to strong performances by unconventional producers. In addition, in 2020, production by OPEC+ countries is expected to be stable compared to 2019, due to Saudi Arabia’s desire to influence prices. US unconventional oil companies will continue to produce, but at a slower pace in 2020.

Turning to natural gas, the number of gas liquefaction projects is increasing because liquefied natural gas (LNG) is less expensive and more environmentally friendly in terms of emissions than other energy sources, such as coal for instance. Accordingly, in 2020, production is expected to increase by 28 million tons, the vast majority of which will come from the United States. Coface expects strong growth in natural gas production to influence prices if demand turns out to be weaker.

Natural gas prices vary across regions, which all have their own benchmark prices. However, prices are expected to continue to decline as a result of the abovementioned increase in supply, particularly of LNG. In addition, demand is expected to remain soft this year due to the economic situation. For example, prices on the Asian LNG contract index fell by 56% between Q3 2018 and Q3 2019. In addition, natural gas buyers are increasingly turning to short-term spot contracts and away from contracts indexed to crude.


The downward trend in crude oil prices undermines the financial situation of exploration and production companies, and is one of the main risks to their profitability 

The majors, which are mainly American and European, manage to offset these risks through more diversified assets and lower break-even costs than smaller companies in the sector. In this segment, the players with the highest risk profiles are those operating in the unconventional oil sector, particularly in the United States. According to the Institute for Energy Economics and Financial Analysis (IEEFA), US unconventional oil producers generated negative free cash flows in the first and second quarters of 2019, owing to increasingly financially burdensome investments while cash flows were weak. According to a March 2019 survey by the US law firm Haynes & Boone on the borrowing conditions of oil companies, North American companies expect borrowing base redetermination to be sluggish in 2020. Low Brent and WTI prices are the main factors causing financing conditions to be more challenging. This trend is coupled with the shifting requirements of new investors joining company boards. Overall, these investors tend to demand higher returns on investment. Given the economic situation, this could force some companies to restructure. Finally, firms are having to look for alternative means of financing, in particular by involving funders in production processes through arrangements such as drillcos and farmouts, where costs as well as revenues are shared.


Financially weakened contractor companies are the most at risk

Contractor companies are facing declining activity as producers are investing less and tightening their pricing terms, as mentioned above. Annual global capex by exploration-production companies fell by 41% between 2014 and 2018, weakening the financial situation of services companies. These difficulties are compounded by overcapacity in the segment, which is a direct consequence of efforts to boost production capacity in recent years, particularly between 2007 and 2014. Because this increase in capacity was mainly financed by debt, net debt levels are running high, reaching 35.6% at the end of 2018, only slightly below the historic peak of 37% seen in 2016. Companies in this segment, in the United States for example, will have to honour a very large stock of debt estimated at USD 137 billion and set to mature, according to Standard and Poor’s, between 2020 and 2022. Coface therefore expects to see attempts to restructure debts, payment defaults, and even asset disposals or structural changes in some instances, such as TechnipFMC’s spinoff in August 2019. These developments are taking place at a time when exploration and production companies are demanding more efficiency from their subcontractors, leading them to lower their prices. Competition is therefore increasing between oil & gas services companies as production volumes and prices head downwards. This situation is prompting some firms to rethink their business models and to grow their activities in related fields. For example, Baker Hughes, a subsidiary of General Electric, is diversifying into natural gas and offering services such as leak prevention.


The situation of refineries accurately reflects the sector’s difficulties

According to the International Energy Agency, refineries had to contend with thin margins in the first half of 2019. Except for China, which posted modest growth in the first half of 2019, overall growth in the supply of petroleum products was disappointing (-0.6% in Q2 2019 at an annual rate) due to unexpected maintenance and refinery closures attributable to extreme weather conditions in the United States, while disruptions in France and Germany caused some refineries to halt or scale back their activity. Even so, prices were impacted by growth in demand, which amounted to +0.3 million barrels per day in Q2 2019, a level not seen since the last quarter of 2016. As for all companies in the sector, more stringent environmental standards in client sectors will hurt refinery activities. A case in point is the IMO 2020 standard, which comes into force this year and requires shipping companies to use marine fuels with lower sulphur content. Finally, some refineries producing heavier derivatives may close during the year due to limited storage capacity. 


Note for the reader:

  • Net margin: profit or loss on sales
  • Majors: Large oil and gas companies that dominate the world market. They are mainly American and European.
  • Unconventional hydrocarbons: These are hydrocarbons found in unusual underground positions. As a result, they require particular extraction processes, which are often more complex than conventional processes, as it is the case for shale oil.
  • Spot contracts: These are contracts used on spot markets, where traded assets are delivered and settled instantly.


Last update : February 2020