Oil servicing firms may go bankrupt, says report

With the crude oil market likely to remain depressed for the rest of 2020, some oil servicing companies in Nigeria may eventually go bankrupt, Agusto & Co. has said.

The rating agency and research firm, in its 2020 oil and gas servicing industry report, said the Nigerian oil and gas servicing industry had recorded a substantial increase in the number of indigenous servicing companies in recent years.

“The industry is dominated by a few foreign servicing firms, which are estimated to be engaged in close to 60 per cent of oil and gas projects in Nigeria,” it said.

According to the report, local firms currently dominate less complex field support services such as security, transportation and procurement due to relatively low scalable technology compared to the foreign counterparts, among other factors.

It noted that the COVID-19 outbreak had worsened conditions in the oil market.

The firm said, “Several key projects in Nigeria, including the Obiafu-Obrikom-Oben pipeline project and Shell’s Bonga North field development, have been suspended due to lull in the crude oil market.

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“Delays in sanctioning of these projects will impact Nigeria’s oil and gas servicing industry’s near to medium-term performance, considering the substantial contracting opportunities these projects provide.

“Owing to prevailing difficulties in the operating terrain, a number of operators in Nigeria including international and indigenous companies have slashed contractor rates by up to 50 per cent while capital budgets have been reviewed downwards by an average of 20 per cent.”

The report noted that several promising exploration and incremental projects had been stalled partly due to the unfavourable regulatory stance.

It said, “This situation is expected to be worse off considering the adversities created by the COVID-19 pandemic. Agusto & Co. expects the crude oil market is likely to remain depressed for the rest of 2020.

“Agusto & Co. expects a huge number of job losses, while some oil field servicing companies may eventually go bankrupt.”

According to the report, a strategic option for when the market recovers might be consolidation, given the lack of strong fundamentals for a stable oil market.

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It said in addition to bolstering performance, a consolidation might help regain some level of bargaining power from E&P operators.

 The firm said, “Barring no improvement in the dire global economic situation, cash flows are expected to remain very weak.

“Legacy debt obligations coupled with a likely spike in the impairment of newly acquired debt could lead to a massive deterioration in the financial condition of oil and gas servicing companies.”

“Albeit marginal, naira denominated debt obligations will expand owing to the devaluation, which creates a worse-off situation.”

It added that the potential for growth was also likely to remain muted, owing to unfavourable oil prices.

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