Shell’s decision last week to cut $15bn (£9.8bn) in costs is one of the largest austerity programmes ever announced in British corporate history, and there could be more pain to come.
BP, hurt by oil prices that have plunged by more than 50% in the past seven months, said on Tuesday that it would cut its capital expenditure by up to $6bn.
How fast and deep these two oil giants can rein in costs remains to be seen, but one thing is clear – the entire oil and gas sector is undergoing significant structural change. And it is a transformation that will have knock-on effects across a host of industries in Britain, including property.
The initial impact from the oil rout is likely to be a wave of mergers and acquisitions, in a sector that already has form on this. Back in 1999 when oil prices halved from $20 to $10 a barrel, it ushered in a host of consolidation, creating the oil majors of today. Exxon and Mobil merged in a historic $80bn tie-up in 1998 – a union so large it was likened to the creation of a small oil-rich nation – and kicked off a host of other deals that created today’s BP, Total and Chevron groups.
While such “mega-mergers” may not happen again (although that pre-Christmas rumour about Shell buying BP refuses to die), there should be significant merger and acquisition activity.
Consultant AT Kearney said that between January and November last year there was $440bn of M&A in the global oil and gas sector, up significantly on the $338bn haul the year before. It expected M&A totals to rebound even further in 2015 as dramatically lower oil prices caused a big shakeout for those with high costs and debt.
The most likely in line for consolidation are the oil service companies, particularly those providing drilling and seismic services, as both margins and demand come under pressure. Some of these service providers are private equity-backed and are highly leveraged, making restructuring and consolidation even more likely.
Arle, a manager of private equity funds and part-owner of Stork, one of the North Sea’s biggest oilfield service providers, is already said to be sounding out investment banks about a potential sale.
AT Kearney said cost and cash flow pressures were an issue across the entire sector and many companies may have to opportunistically seize scale and revenue where they can to “simply weather the storm”.
However, while it may be all shifting sands and gloom in the energy sector, falling oil prices are not bad news for everyone. In fact, it could provide a welcome boost to consumer spending in the regions.
Nigel Hugill, executive chairman of Urban & Civic, spoke recently at a JP Morgan conference on how lower fuel costs could have a positive effect on consumer spending in the regions.
He claimed his mother (who lives in Durham) could tell him the cost of a litre of petrol to the last decimal point, while his wife (who lives in London) could not. This, he believes, reflects how much greater the percentage of a household budget is spent on fuel in the regions than in the train-commuting south.
Centre for Cities said an analysis of commuting by car showed that 17 of the top 20 cities were in the North, Midlands or Wales where more than 60% of the population commuted by car. The bottom 12 were all cities in the South where less than a third travelled to work by car.
During the recession, the regions were hit with a double whammy of falling real wages and record high oil prices. However, fuel prices have now broadly fallen to 2007 levels and that extra £50 or so of cash in the pocket each month could have the same impact as a tax cut.
This is why Urban & Civic is developing a leisure scheme in Darlington as it believes in a stronger-than-expected recovery in regional consumer spending.
Other consumer-facing industries could benefit too, such as supermarkets, which could help alleviate the deep gloom in that sector.
It may well be that although falling oil prices might be bad news for some parts of the economy (and Scottish nationalists) they could have far-reaching benefits too.
Deirdre Hipwell is M&A correspondent at The Times
