Credit: Lokantha/Wikipedia

Why $40 oil isn't bad news for everyone

The oil industry reels as American frackers and OPEC sheikhs refuse to stop pumping. So why has Wood Group just spent $150m on US rival Infinity?

by Adam Gale
Last Updated: 03 Dec 2015

If you’re stumped for bargain Christmas gift ideas after Black Friday, consider buying your loved ones a barrel of crude oil. Brent crude has just hit $43 (£29), its lowest price since the dark days of 2008-9. Considering it was over $110 last summer, that’s a pretty serious discount.

The cause is an ongoing price war between upstart US frackers and OPEC sheikhs jealous of their sliding market share. OPEC responded to America’s re-emergence as a major oil power by maintaining its own high production, in an effort to collapse the price and drive the high-cost frackers out of business.

It’s half worked. In a miracle of market alchemy, black gold has been transformed into so much lead, but the frackers don’t seem to be going anywhere, despite many fields operating at below cost. The reason appears to be because banks aren’t closing their lines of credit, perhaps because they’re fearful of receiving payment from defaulting firms in depreciating oil assets.  

In either case, US production in September was only 2.7% below its April peak, at 9.3 million barrels a day, according to the Energy Information Administration, and inventories are continuing to rise despite the arrival of winter.

All this would seem to point to the oil price remaining depressed for some time, which makes for an odd backdrop for oil and gas services business Wood Group to announce the $150m acquisition of Texan rival Infinity Group.

Except of course not every oil and gas company is feeling the pinch quite as severely. Broadly speaking, cheap oil is bad for upstream (exploration) but good for downstream (refining) as the margin between crude oil and refined products increases.

Wood Group provides services for both. Combined with its aggressive cost-cutting strategy (headcount fell 13% between December 2014 and the end of June), this kept its fall in first half earnings (EBIT) to only 7.4% to $226m.

Not only can it afford to buy a rival, then, but also it has an incentive to do so. Infinity Group provides services to the downstream industry in America, where refining is traditionally more profitable than in Europe. Buying it will help Wood Group to diversify more towards downstream, much as Shell’s rather more pricey purchase of BG Group - which got approval in Australia today – is largely about diversifying into liquefied natural gas.

The purchase does imply that Aberdeen-based Wood Group believes cheap oil will persist for some time. If it thought crude would rebound to $100 in six months, surely gobbling up a struggling (read: cheap) upstream-focused business would be more tempting instead.

It may be in for a shock though, if rumours ahead of OPEC’s meeting in Vienna this week are accurate. The word is that the Saudis are willing to cut production so long as regional rivals Iran do the same. Victory for the frackers?  We’ll have to wait and see.

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