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News Extra: Scottish companies worst affected by UK oil sector downturn

01 July 2016

According to the Bank of Scotland, 43% of UK oil and gas firms are planning further cost cutting to help manage the impact of the sector’s industry downturn. ‘Re-evaluating Strategies’, the annual Bank of Scotland report on the oil and gas industry, found that 32% of businesses plan to cut more jobs in 2016 as the oil price takes longer to recover than expected.

The survey of decision makers from 141 oil and gas companies across Scotland, England and Wales, ranging from producers to suppliers down the supply chain, found that, while the short term outlook was very gloomy, there were some potential silver linings. The general message from the industry is that the way through the present bad times involves still more harsh decisions, including further substantial cost cutting, but a sustainable future and even some growth, albeit patchy, is within reach.

Of the companies surveyed, 51% made redundancies in the past year. For Scottish firms, that was true of 63%. In Scotland, 57% of companies surveyed within the industry and its supply chain said they had been severely or quite badly affected by the slump in oil prices, and 41% of firms across the UK. For every one job created last year, they said that six had been lost.
A quarter of companies said they had grown by diversifying into other sectors. Larger firms are looking to decommissioning of North Sea equipment. Small firms aim to gain more business from renewable energy investments. But there has been a drop in the expectations that business will come from the shale gas industry.

A total of 7% of all firms say they have been affected severely and another 34% quite badly by the price fall, while 25% say they have experienced a positive impact.

However, the impact has been much worse on large companies turning over more than £750 million, among which 19% say they have been severely affected and 48% quite badly affected. As these are also major employers, this is obviously damaging for North Sea employment.

The sharp downturn in exploration and field development work has hit subsea firms (80% badly or severely affected) and drilling companies (75% badly or severely affected) worst of all, but only 19% of exploration and production companies said they have been badly affected (none severely), perhaps because many have been cushioned by the hedging of forward sales, which tops up revenues.

An indication that employment has borne the brunt of the price slump comes in the descriptions given by executives of how their business has changed in the last year. More than half (58%) say they have either implemented efficiency measures or reduced costs. Nearly two-thirds (66%) of small companies have taken these actions. But there have been compensating positive actions. More than a third (38%) said they had grown, through diversification (22%), organically (10%) or by merger and/or acquisitions (6%).

Companies have been also been taking other remedial actions to become more resilient in a low-price environment. Focusing on the actions of the two-fifths of companies that said they had been severely or badly affected by the price fall, the most common strategies have been to collaborate with other firms (57%), to look to international markets (55%), and to diversify (40%). There has also been investment in new technologies (28%) and in research and development (24%). More defensive actions have included disposal of assets (28%) and even of business divisions (22%).

Responses to low prices do vary between large and small firms. Large firms are potentially most likely to have collaborated with other businesses (64%), much more likely to have agreed new cash flow finance products (50%) and to have sold an area of the business (36%), an indication that large firms are under the most pressure.

Mid-sized firms have been more interested in international markets (72%), in diversification (50%) and in research and development (33%).

Smaller firms of less than £25 million turnover have been most receptive to investment in new technology (31%) in the past 12 months.

Among the 41% of all companies severely or badly affected by the price fall, only 40% think they have done all they can, or at least enough to survive the downturn, while 43% think there is more to do. Opinions about the ability to continue trading vary by company size, with mid-sized and large firms the most uncertain.

Again, companies based in Scotland are under most pressure, with 56% expecting that there is still more to be done. Despite the uncertainty, about nine in ten (91%) of the severely or badly affected firms feel they have enough knowledge and expertise within their business to deal with the low-price environment. Another outcome for businesses that plan to scale back or make efficiency measures to improve profitability in the next 12 months (48%), and those that have done so in the previous 12 months (58%), is that in order to survive, the industry has become leaner, more agile and efficient, which will set it in a more competitive and sustainable position for the future.

The same rather equivocal view is reflected in feelings about the year ahead. About the same number of companies feel optimistic (30%) as feel pessimistic (28%). Gloom, however, is pervading large companies. For every two feeling optimistic, there are five feeling pessimistic. In contrast, for every three smaller firms expressing optimism, there are only two pessimists.
While 67% are looking at international opportunities, this is down on 91% last year.

Noteworthy is the considerable drop in interest in North America, traditionally the favourite area for UK firms where only 16% of firms are looking at investment opportunities compared to 31% last year. The Middle East, West and North Africa are increasingly of interest to UK firms.
Stuart White, an industry specialist with Bank of Scotland, said: "With oil prices currently hovering around the $50 mark there is hope that prices have bottomed out and have begun to slowly and modestly recover. Many businesses however, undoubtedly face more difficult decisions on cost savings, jobs and investment.

"While the blow from depressed oil prices has been severe for many businesses and individuals impacted by job losses, the sector is proving itself to be among one of the most resilient industries in the UK."

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