Readers may have seen articles in Fairfax media last week where analysts at Goldman Sachs reported that oil would likely stay 'lower for even longer', with an outside chance of falling to US$20/barrel due to the short-term dynamics of the global oil market.
A number of global banks and analytical firms have been cutting their forecasts for crude oil in the near term as US shale and OPEC oil output have remained constant, keeping pressure on supply. Additionally there are fears that a number of 'Mega-LNG' projects in Australia – long-touted as the future of our energy industry – will not be economically viable even at US$60/barrel, let alone with current prices in the mid-US$40s.
Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) are both under threat with their Gorgon LNG and Asia-Pacific LNG projects coming to completion later this year. Both companies have a mountain of debt, and Santos, in particular, is reportedly weighing up asset divestments to beat back its blooming pile of US-dollar denominated debt.
Some investment banks have been expecting merger and acquisition activity to kick off in the sector, but aside from Woodside Petroleum Ltd's (ASX: WPL) opportunistic bid for Oil Search Limited (ASX: OSH) there has been very little activity.
Part of the problem is that in recent years, many producers (both Australian and internationally) used debt to rapidly expand their operations in order to profit from high oil prices. Unfortunately, that decision has left a 'hangover' of debt that has to be paid down from vastly diminished earnings, meaning there are very few players – besides Woodside – capable of funding expansion through acquisition.
Oil Search has its hands full with its PNG operations, which have plenty of room to grow production without the need to buy up other projects. While there is talk of merger and acquisitions, it's difficult to see any more major offers for Australian players emerging in the near term.
Barring an increase in oil prices, I would not be optimistic of a rebound in the share price of oil/gas stocks in the next twelve months.
