Crude Oil Prices and Opec
The falling oil price has continued to form a challenge for the business Reuters

On 30 July, it was announced that around 12,500 workers in the oil and energy sector across the globe will lose their jobs. As the oil price continues to tumble, companies are going to great lengths to cut their overhead spending. Firms such as Shell and BP, which have published their half-year results, and Chevron and Exxonmobil have seen their revenues fall on the back of the dropping prices.

The increased merger and acquisition activity in the market, alongside the cuts in spending, can be attributed to prices experiencing a "prolonged downturn", as coined by Shell. Head of M&A at BDO Simon Leathers, whose focus lies on smaller oil companies, told IBTimes UK the market is stretching some companies, but there are also opportunities.

He said: "Clearly, these job cuts are not great news for those immediately affected but the share price has shown a very positive reaction. Companies have just explained that there are very significant cost savings there and that is what we like to see and the market has reacted very well." Leathers added this is the answer of the oil giants to the new price environment.

Brent crude, a major benchmark used to measure the oil price has fallen by more than 54% since June 2014 when it was around $110 (£70, €99), down to around $53 on 31 July 2015. Some attribute the fall in the value of oil to an unforeseen strength of the US shale market and other alternatives; others blame the surging export from Saudi Arabia. Whatever the reason behind the fall is, it has become more apparent to oil firms that the low prices are not as temporary as they had hoped. With Libya expecting to pick up oil production again after being prevented by years of national conflict, and the lifting of UN sanctions imposed on Iran because of its nuclear programme, the oil price is highly unlikely to climb anytime soon.

The share prices of many Western oil companies have climbed slightly after management measures that would result in cost trimming were announced but many investors have given up on the industry, resulting in the share prices of those firms falling sometimes by more than a quarter since the enormous drop in Brent crude since June 2014.

Biased market

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"Mid-market companies are now under pressure because of the oil price environment," Leathers said. Where big oil firms have the possibility and scale to trim costs and adapt to the long-term challenges in the market, the smaller companies are more hurt by these developments.

"Undoubtedly, the mid-market companies are suffering. It's a biased market," he added. Those investors, who are much needed by smaller firms, are clinging on to the hope of a turnaround in the oil business and invest in larger companies that have more facilities and equities available to be agile and deal with the problems in the markets without reporting major losses.

Both Shell and BP announced major cuts in capital expenditure, something that is not as easy for junior companies to do. The notable increase in merger and acquisition activity in the oil business is a focus for the companies' desire to increase return on investment and survive in a market where smaller firms can feel like smaller boats in an ocean filled with yachts.

Leathers said: "The synergies and cost cuts that companies have announced in an effort to retain as much cash as possible is all about these businesses trying to firm up their ability to survive ongoing uncertainty with regards to the price. It's all about cash flow and returning funds at the moment."

Undoubtedly the midmarket companies are suffering. It's a biased market.

Not only are bigger oil firms better able to provide resistance to the challenges in the market dragging the business down, they are also more eligible to profit from the few advantages that come with the fall in Brent crude.

"The majors have purchasing power back in their court again, where the juniors are in a lot less enviable position," Leather said. Despite this, he argued that no regulation is necessary. "If you use a $70 price in order to produce your forecast, and that is on the basis that you have secured financing, that's a known entity to the finance providers and if you then move away from that, you can see why financing doors will suddenly start to close."

The Organization of the Petroleum Exporting Countries (OPEC) has refused to cap production multiple times, arguing the market will set the price itself. Leathers agreed, calling the perhaps natural decline of the oil price part of the supercycle.

With Iran and Libya eager to fully open taps again and bigger oil firms looking to dispose of overhead costs in order to survive in the environment, the future of the industry might look very bleak. However, oil and energy companies of all sizes have turned to mergers and acquisitions as a method to adapt to the challenging situation, which might offer hope for the oil business.

OPEC