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Prolonged drop in oil price reshaping the oil and gas sector

A new report from leading business and financial advisor Grant Thornton UK LLP finds that a prolonged drop in the global oil price is forcing companies in the sector to dramatically reassess and reshape their operations.

Based on a survey of senior oil and gas executives, the report finds that 42% have put some plans on hold, while 11% need to raise extra finance or sell existing assets to remain operational. Moreover, a further 11% suggest they will need to engage in significant financial restructuring before the end of the year.

Asked for a prediction on oil prices by the end of the year, a divergence between existing producers and early stage companies was clear, with 63% of early stage respondents predicting the price of oil to be between $55 - $65 per barrel, as opposed to 46% of existing producers who saw the price within this range. Looking further, to the end of 2016, 85% of early stage company respondents believed the oil price will rebound to between $56 - $100 per barrel, whereas 66% of existing producers thought this.

Linda Beal, Global Leader for the Energy and Resources industry at Grant Thornton UK LLP, commented: "Despite demand remaining buoyant over the past year, oil prices have been on a rollercoaster of volatility which the industry hasn't seen for decades. This has forced many oil and gas companies into a new mindset. Particularly at the smaller end of the spectrum, companies have had to redefine the meaning of 'normal operations' over the course of the year and that's leading to some transformative, and often difficult, decisions being made. Whilst it's understandable that nerves have been rattled in the short-term, doing nothing is not an option – nor is that approach sustainable in the long term."

The report suggests consolidation in the sector will increase over the coming months, particularly amongst suppliers to the industry. 42% of respondents believe heightened merger and acquisition (M&A) activity along their supply chain is a likely outcome, as margins are cut and operating costs continue to decline.

Beal continued: "With the prospect of contracts not reverting back regardless of a bounce back in oil price and on-going M&A activity in the supply chain, agility is proving the key to success. Executives need to keep all options open with a more flexible workforce that can readily scale up or down and is even more able to move internationally than has been the case until now."