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Volatile markets impact the energy sector

How a company is affected depends largely on its size

Since the bankruptcy of Lehman Brothers on September 15, 2008, the U.S.-based credit crisis has gone global, leaving one financial institution after another in economic ruin and businesses of every stripe with nearly unprecedented fiscal challenges. It is a situation that surely brings consequence for the global economy in general and capital-intensive resource companies in particular, but it also brings opportunity – the larger you are today, the more likely you are to be in charge tomorrow.

"Overall, the results will be mixed: major integrated companies are well-positioned to weather the storm while the mid-sized and smaller players may be prone to acquisition and consolidation."
— Dick Cooper

“New large capital projects in the oil sands that are not fully funded or backed up by strong balance sheets may encounter some challenges,” says Dick Cooper, national leader of Deloitte’s Energy & Resources practice. “Mining start-ups are also feeling a pinch as the speculative capital they rely on dries up. Overall, the results will be mixed: major integrated companies are well-positioned to weather the storm while the mid-sized and smaller players may be prone to acquisition and consolidation.”

The largest energy players are likely to survive because of their ample capital, the fact that many of them have acquired producing properties with immediate cash flow, and because they tend to conduct tight capital reviews. Mid-sized producer companies will be more inclined to preservation: they have relatively limited cash flow and can be expected to reduce capital expenditures out of concern for commodity price collapse.

For their part, mid-sized development companies are effectively shut out of equity markets for the time being and will be waiting out the financial crisis on the sidelines. Similarly, exploration companies, seeking survival but with little or no equity, will most likely do the minimum possible to maintain ownership while limiting cash outflow. Meanwhile, with the price of oil having fallen more than 50% since peaking at $147.27 a barrel in mid-July, the outlook on Canada’s increasingly dominant unconventional oil sector has begun to weaken, witnessed primarily in several major companies’ announcements in early November of project delays.

“A lot of heat is leaving the system and will probably continue to do so for some time,” says Cooper. “In this kind of environment, it is best to be governed by a long-term view: well-financed companies will be watchful for distressed assets and companies to acquire. Publicly owned utilities will continue with their infrastructure programs with little disruption, while the pipeline companies will likely delay in step with the producers to optimize efficiencies. The situation is definitely turbulent, but, like all turbulence, it will end. So, the real question is: where do you want to be when it’s over.”

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