OREANDA-NEWS. December 03, 2008. Higher oil prices, combined with the success of wells being brought on-line, show an increase of 32% in revenues for 50 of the largest listed oil and gas companies outside of the FTSE-100, according to PricewaterhouseCoopers (PwC) inaugural mid-tier oil and gas publication ‘Prospects: a review of mid-tier oil&gas 2008’, reported the press-centre of PwC. 

Companies with producing assets have also seen a significant increase in profitability with a pre-tax profit of US11.3bn, a huge improvement from last year’s US8.0bn. Dividends rose by 70% to US2bn although this increase is modest in absolute terms relative to the improvement on the profitability of producers.

David Gray Energy, PricewaterhouseCoopers, Utilities & Mining Leader in Russia, says:
“The combined impact of the global liquidity crisis and the associated recent falls in the price of oil to close to 50 dollars a barrel mean that the credit markets are now closed to all but the largest and best financed companies in the oil and gas sector. Consequently, and despite the record earnings reported by the mid-tier sector in 2007, the entire sector is now financially distressed.”

The sector saw a 50% increase in aggregate market capitalisation to USD 80.1bn (Ј40.2bn) with the International Main Market experiencing a significantly higher growth rate than AIM. This was due to a combination of higher organic growth and the transfer of Oilexco and Imperial Energy Corporation from AIM. The two companies had a combined market of capitilisation of US4,666m (Ј2,344m).

The largest six companies represent 33% of the total market capitalisation and of these six companies, the largest was a new listing on the International Main Market in 2007. The other five have seen an increase of 63% in market capitalisation. This reflects their success in delivering high levels of production from existing and/or new fields and increased demand for oil equipment and services.

David Gray continues:
”We believe that this will lead to consolidation in the sector in early 2009 with the more financially stong, better funded companies, including state backed companies, taking advantage of the low prices to aquire companies as valuations well below the find cost of the associated reserves.”

The only reduction seen by these companies was in financing activities with net cash flow down 35% to US5.4bn although interestingly, companies with oil equipment, services and distribution activities saw an increase of 37% in financing activities of US 1.2bn. Difficulties in raising finance are more prominent within the AIM market and the trend of reductions in cash being raised has continued into 2008.

Companies with existing production activities are better placed than companies who have focused on exploration. Further pressure will be the need to reduce associated costs to maximise funds available for future exploration and development.

With the current challenging economic climate, demonstrating shareholder value is key. This can be achieved by thorough analysis of investment assets and strategies, liquidity profiles and financial risk management.

Surprisingly, due to the lack of an agreed industry standard on disclosure of information, we came across difficulties during our research in compiling aggregate statistics for companies proven and probable reserves or production. Although there is guidance in the UK Statement of Recommended Practice — Accounting for Oil and Gas Exploration, Development, Production and Decommissioing Activities, there are currently proposals for public opinion on the disclosure of reserves. PwC feels the ongoing absence of a common approach is detrimental to financial statements.

David Gray concludes:
“Management of the mid-caps will have to focus on liquidity to survive, and on the quality of their reporting to enhance their bargaining position with banks, shareholders and potential partners. The next twelve months will be all about cashflow rather than profit or net assets, as without positive cashflow many will not survive.”