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Medium term history

The oil and gas industry is subject to significant price volatility, with fluctuations being driven by the economic cycle. Price rises occur during periods of global economic strength, when demand increases and conversely prices fall in downturns where demand is outstripped by growing supply.

In the last 10 years, the industry has gone from the boom of 2011-2014, where oil prices were in excess of $100/bbl, to the crash of mid-2014-2017, where the global economy faced one of the largest and sustained oil price declines in modern history.

The collapse in oil prices was primarily due to oversupply, falling demand from slow growth in emerging markets (especially China) and a growing trend for environmental policy to push energy consumption away from fossil fuels. The impact was compounded by OPECs decision to maintain production levels.

Since the crash, global demand for fuels has grown and the industry has looked to implement policies to better protect itself against future uncertainty. However, the sector remains highly volatile and reactive to global geopolitical trends – recently in September 2019, an attack on Saudi Arabia oil processing facilities resulted in the largest individual supply disruption for 30 years.

Current outlook

The oil and gas industry has just experienced its worst quarter on record, with the perfect storm of supply and demand issues causing an unprecedented fall in oil prices. In April the WTI even moved into negative territory, reaching a low of - $40/ bbl due to likely storage constraints in the US.

On the supply side a price war erupted in early March between Saudi/OPEC and Russia following the failure to reach an agreement on reduction in production. On the demand side, the impact of COVID-19 has resulted in a slump in demand, which is forecast to fall by 9.3mb/d[1] in the second half of 2020 – the equivalent to a decade of lost growth. In an attempt to stabilise supply, OPEC+ has agreed cuts to production of 10mbbl/d in May and June[1].

The current outlook for the oil market remains extremely uncertain and the severity of the price change will be far greater than the level of stress testing undertaken by most exploration and production companies.  Many have prudently hedged a good proportion of production for 2020, which will insulate them from any immediate impact, but should the low oil price environment continue into 2021, there will be material reductions on the level of cash flow generated across the sector.

As a consequence there will be increasing nervousness from banks and financial stakeholders, who will be resetting price decks used to evaluate financing capacity, and be looking to reduce their exposure.

Within the oilfield services sector, the wider supply chain companies have been working hard to reduce costs (including headcount) but have thus far maintained stability on the back of fairly strong order books. A more significant impact is anticipated in Q4 (as hedges fall away) and cash flow deteriorates. We anticipate the corporate landscape changing quite significantly through a mixture of consolidation transactions, financial restructuring and insolvency.

The recovery in global demand will take time given the uncertainty around COVID-19 and any recovery in oil price will need the fragile truce amongst OPEC+ participants to be maintained to control production levels.  Despite the current decline in the sector, oil companies still need to invest in ways to offset natural production declines and to develop technologies needed for clean energy transitions around the world. Global capital expenditure by exploration and production companies is forecast to fall by c.32% this year to $335 billion, the lowest level for 13 years[1]. This lack of investment could have a significant impact on the future of the industry. 

Without a recovery by Q4, there will be increasing levels of stress across corporates, resulting in defaults on financing and restructuring across the sector as we go into 2021. There are already warnings around future defaults – and it is likely there will be casualties across the sector due to this crisis. The survivors will be those who:

  • Proactively reassess their business plans;
  • Implement a rigorous focus on cash preservation and mitigations to meet a range of scenarios; and
  • Undertake early engagement with financial stakeholders to secure a stable funding platform through 2020 and 2021.

[1] IEA: Oil Market report – April 2020

Stress and distress temperature rating

Oil and gas sector temperature assessment as at 1 June 2020, covering medium term history and outlook:

Graphic showing the Oil and gas sector stress and distress temperature rating

Key trends across the sector right now

  • Oversupply resulting in policies to implement production limits 
  • Global storage capacity approaching its limit
  • Uncertainty around prices requiring companies to revise/refresh Business Plans 
  • Exploration and M&A activity is on hold
  • Implementation of cash and balance sheet protection measures, for example: 
    • Suspension of planned share buybacks 
    • Operating costs reduction initiatives 
    • Reduction in Capex 
    • Fundraises
  • Environmental focus on both current production and future diversification requiring additional investment

Case studies

Project Naples

Senior Lenders engaged KPMG to carry out an IBR, pricing analysis, lender advisory, contingency planning and review of the Group’s short term cash flow forecasting as a result of covenant breaches. The highly levered Group (total debt of $1.9 billion) had a complex capital structure involving senior debt, high yield bonds and retail notes.


A full restructuring solution was achieved with a successful equity fundraising of $100 million and a debt restructuring including a scheme of arrangement of the bondholders and amendments to the Senior debt, which remained whole.

Project Dantes

Shareholders to an oilfield services business with c£100 million debt and a highly complicated security structure, with assets and entities spread across the world engaged KPMG post-COVID, to assess its options in light of severe financial challenges.


KPMG undertook a detailed review of funding structure, analysing options both financially and strategically in terms of their impact on returns to other parties. We supported the shareholders in securing a consensual rescue and restructure which, whilst giving the Group’s lenders more input over strategic management, preserved the existing shareholders’ equity positions.


KPMG UK's national sector teams

Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.