North America oil drillers will likely come up $102 billion short on the cash they need to operate this year as crude prices fall to $30 a barrel, according to a study by the consultancy AlixPartners.
FuelFix.com reports the $102 billion cash shortfall could force more domestic crude producers to take more drastic measures in 2016, including widespread pay cuts or wage freezes, cutting employees’ hours and pressuring suppliers for another 15 to 20% reduction in service and equipment prices.
Many drillers will have to shed the traditional model of cutting items from an existing budget and adopt a so-called “lights on” approach: starting with a budget of $0 and spending only on essentials.
“They’re quickly beginning to exhaust their options, and that’s why you’re seeing more bankruptcies,” says Dennis Cassidy, managing partner at AlixPartners, which specializes in restructuring. “There isn’t an easy solution.”
AlixPartners believes returns on the capital that oil companies spend will drop to 3%—and that’s just for the firms that are still “in the black”—compared to 20% a decade ago. Profits, the firm said, are set to fall 20% to 30% this year.
Worse than missing profits, though, is the cash shortfall. Last year, capital-market investors poured billions in debt and equity into oil producers, believing crude prices might recover quickly. But equity and debt markets are largely closed to all but the best operators, and that will likely force drillers to divest more assets, cancel projects or cut back on production volumes, Cassidy says.
“People are recognizing they’re going to have to throw in the towel at some point,” he says. “This is not a drill. This is the real thing.”
