If 2015 was defined by falling commodity prices, 2016 may simply be defined by continuing lows. Over the course of 2015, oil prices dropped approximately 31 percent.1 More than 40 companies filed for bankruptcy, and upstream companies,2 in an effort to protect balance sheets, cut capital expenditures in the fourth quarter by approximately 51 percent.3 Forecasters spent much of last year predicting if and when the market would hit bottom, and many agree that the outlook for 2016 remains bleak.
While many producers were able to stay afloat last year by lowering costs and implementing greater operational efficiencies, further savings may prove to be elusive. Additionally, for many, hedging programs will roll off in the coming months.4 As more companies are forced to sell oil at current market prices, they will face the impact of the distressed environment more directly. Further, and in addition to losing the protection of hedged prices, companies that have suspended drilling obligations over the past 12-18 months may soon be forced to either forfeit their leasehold interests or drill wells that may be uneconomical in an effort to perpetuate their leases.
Ultimately, everyone, even producers with solid balance sheets and cash reserves who will continue to weather the storm, will face some difficulty over the course of the year. Highly leveraged companies with prized assets may resort to asset sales in an effort to raise capital, or, if such companies are still unwilling to sell, they may search for joint venture opportunities with capital providers. Companies with few quality assets and high debt will likely continue to add to the already growing number of restructurings. As producers continue to feel the pinch, oil field services companies will continue to feel the effects of cost-cutting measures, and even midstream companies, protected from commodity price fluctuations to some degree by the nature of their long-term contracts, may be affected as their upstream partners run into difficulties.
Investors will inevitably come across a broad range of investment opportunities as commodity prices stay low, and the real key to successfully executing opportunities will be patience and proper diligence to separate the deals worth pursuing from the duds.