A large number of independent oil producers and explorers won’t survive the next 12 months, according to Genel Energy’s (LSE: GENL) chairman, Tony Hayward.
At an industry conference in Cape Town earlier this month, Mr Hayward reported that the oil market is now oversupplied by as much as 2m to 3m barrels per day. Shale oil has completely changed the nature of the market, overwhelming underlying demand, and it will take an estimated 18-30 months for the market to rebalance naturally without intervention.
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Rebalancing
Unfortunately, some companies may go under as the market rebalances. Capital markets, which welcomed oil producers with open arms last year, have now closed for many participants leaving highly leveraged producers with few options.
And things could get worse for the industry of “wild cards” Iran and Libya ramp up production before the market completes its rebalancing.
However, despite his gloomy outlook for the oil industry in the short term, Tony Hayward is convinced that over the long term the price of oil will recover, a view echoed by analysts at Statoil today.
Statoil believes that with oil at $50/bbl the market will tighten over the next 12 months or so. Producers will cut investment and by 2018 Statoil believes that demand will once again exceed supply. With this being the case, the Norwegian oil major believes that the price of Brent crude could recover to $80/bbl by 2018.
Well-positioned
Genel itself is well positioned to ride out a prolonged period of low oil prices. Tony Hayward leads an experienced team well aware of market forces, so they’ve always been positioned to weather a period of price uncertainty.
The company’s balance sheet is relatively debt free, and Genel was quick to slash capital spending when the price of oil started its slide last year. Capital expenditure for the nine months ending September 2015 totalled $116m, and the company expects to spend no more than $150m to $175m on capex for the whole of 2015. Net debt at 30 September totalled $211m, $5m lower than the figure of $216m reported at the end of June.
What’s more, Genel’s outlook figures are based on oil prices of $50/bbl, which is a lower marker than many of the company’s peers. BP, for example, is using $60 oil as a benchmark.
The third quarter of 2015 was a turning point for Genel. The company finally started to receive regular payments from the Kurdistan Regional Government during the quarter, and revenue should begin to pick up as a result.
That said, only time will tell if the KRG will keep its promise to continue paying Genel on a monthly basis. Although, for the time being, things seem to be moving in the right direction.
City analysts expect Genel to report earnings per share of 12.1p this year and 19.1p for 2016. Based on these figures the company is currently trading at a forward P/E of 28.6 and 2016 P/E of 23.
