Deciphering Third-Party Business Risk In A Period of Weak Commodity Prices.


Risk management in the oil and gas industry

Across the oil and gas industry, many companies are buckling under the steep decline in commodity prices. Forty-two companies filed for bankruptcy in 2015. And with oil prices hovering near 10-year lows, that number could potentially quadruple this year.

Industry volatility

A recent Deloitte study found that around one-third of the world’s publicly traded oil companies are at risk of bankruptcy. They carry a combined $150 billion in debt, and prospects for raising cash are diminishing amid weaker prices for asset sales and decreased value of secondary stock offerings.

Credit ratings have been cut as companies’ cash flows have shrunk and they struggle to sustain debt payments.

Even for companies that have avoided the cash crunch, the bankruptcies and financial hardships washing over the oil and gas industry pose a significant risk. Liquidity issues for customers or suppliers can have significant—and potentially unforeseen—strategic, financial, and operational consequences. These may include the disruption to capital projects because of supply chain volatility, lost cash flow from important customers, or lost hedges from counterparties.

Mitigating risk

Companies that are struggling with liquidity issues will take whatever steps they deem necessary to avoid bankruptcy or default. In some cases, those decisions can pose even greater financial or reputational risk to their business partners.

The first step in mitigating risk is determining where the risk lies. Given the size of companies today, this can be a massive undertaking that includes analyzing loans and investments, contract counterparties, working capital accounts, and increasingly, public perception through social media channels.

In assessing credit risk, companies should ask how their customers, counterparties, and third-party suppliers are performing; how economic changes may affect them; and whether they need to take action.

Distress risk is determined by capturing public insight, such as real-time public sentiment, executive speeches or presentations, and analyst rating changes.

Assessing operations risk relies on reoccurring non-public financial and operations data that can lead to strategic foresight. These business interactions can indicate risky patterns of behavior unknown to the public that may not be reflected in analyst reports or on financial statements.

Disruption risk analytics

Deloitte Advisory’s approach to analyzing potential supplier and customer disruption involves collecting a wide range of internal and external data and monitoring and evaluating financial stability across a portfolio of vendors, customers, and counterparties. Our approach includes:

  • Proprietary tools for assessing private companies
  • Publicly available data assessment
  • Risk-rating methodologies
  • Stress test trigger event scenarios
  • Continuous results
  • Ranking of strategic suppliers and customers

We can assist companies in the oil and gas industry during this time of market uncertainty by applying our analytics and financial modeling capabilities to help them identify the greatest risks posed by their suppliers, customers, and business partners.

Because of the increased volatility in commodity prices in the oil and gas industry, the costs of unmitigated financial risk is likely to increase significantly during the next three years. Companies need the right tools not just to identify those risks, but to determine the right approach for responding to them.

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