As a result of declining oil prices, a number of American oil and gas operators have recently sought restructuring opportunities, with some even seeking Chapter 11 bankruptcy protections. This trend has had a noticeable impact on the entire upstream sector, which includes both exploration and production (E&P) companies and oilfield service (OFS) providers.
To guard against future fluctuation in commodities prices, E&P companies use hedging strategies such as futures or option contracts to ensure a steady stream of income. For example, by securing a three-year futures contract guaranteeing a sale price of $80 per barrel, a company could hope to survive through a two-year period in which oil prices drop to $50 per barrel.
Impact on OFS Sector
Although these strategies can help E&P companies navigate periods of financial distress, they can have a negative impact on the OFS sector. Measures taken by an E&P firm to decrease its capital budget, such as ceasing all unnecessary new well production or ending production in particularly expensive sectors, reduce the demand for oilfield services and can have a lasting traumatic impact on OFS companies. In light of recent industry trends, experts predict as much as a 20 percent decline in the price of offerings such as fracking services and drilling rig leases. For this reason, they also predict that OFS companies will experience a wider scope of liquidity crises long before their E&P counterparts.