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Oil and Energy Companies enter a struggle for survival

Oil and Energy Companies enter a struggle for survival

Falling Oil prices and global growth estimates due to coronavirus added weight on energy companies.

According to the news published in Financial Times, Australian group Oil Search follows peers with steps to conserve cash in ‘unprecedented times’.

Oil Search is slashing spending by almost 40 per cent this year as Australia’s oil and gas producers enter “a struggle for survival” due to the collapse in oil prices.

The Sydney-based company said on Wednesday that it also would suspend a process to sell a 15 per cent slice of its Alaska oil project and review all operating and corporate overhead costs to conserve cash.

Investment expenditure would fall to $440m-$530m in 2020, from the $710m-$845m previously projected, and non-essential projects would be deferred, the company said.

“While Oil Search is fortunate to have world class assets, these unprecedented times require us to take immediate and decisive steps to position us for a potentially extended period of lower oil prices and business uncertainty,” said Keiran Wulff, Oil Search managing director.

A dramatic fall in oil prices to below $30 a barrel due to the coronavirus pandemic, which has hit demand, and a price war between Russia and Saudi Arabia is forcing global oil producers to cut costs and halt planned expansions.

Another Australian producer, Santos, said this week that it was reviewing all discretionary capital expenditure and would freeze hiring, while Tullow Oil in the UK warned it faces a “perfect storm”.

Analysts said Oil Search, which owns 29 per cent of PNG LNG, a liquefied natural gas plant operated by ExxonMobil, and spent $400m on oil assets in Alaska in 2017, was vulnerable in a downturn due to its net debt of $2.9bn.

“Oil Search is certainly in a struggle for survival along with the rest of the industry due to the oil price drop, with its cash flow break-even at $32 a barrel,” said Neil Beveridge, an analyst at Bernstein. “The company is doing the right thing by cutting spending but it is hampered by its ill-timed Alaskan acquisition.”

Brent crude, the global oil benchmark, was up 0.5 per cent at $28.89 a barrel on Wednesday.

Oil Search said it aimed to refinance a $300m debt facility, which is due in September, well in advance of the expiry date.

But investor concern about the company’s resilience has caused its shares to slump 65 per cent since the start of the year.

Citi said in a note that the market was not focused on capex reductions but rather on Oil Search’s ability to manage its debt burden. “From our conversations with investors, the concern is that OSH breach their interest cover covenant of 3x,” said James Byrne, analyst at Citi.

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