Economic Report 2016 - Oil & Gas UK

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The average rate of return for extraction companies fell to just 0.2 per cent in the first quarter of 2016.

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Furthermore, with capital employed 14 in the basin continuing to increase and depressed prices causing revenues to fall further, the average rate of return for extraction companies fell to just 0.2 per cent in the first quarter of 2016. Despite ongoing efforts to improve efficiency and reduce costs, it may yet fall further over the rest of the year and into 2017 unless prices begin to recover.

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Figure 10: Rate of Return

70

4

60

5

50

40

6

30

Rate of Return (%)

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7

10

8

0

2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4

Source: Office for National Statistics

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4.2 Corporate Finances With the ongoing global market downturn, many oil and gas companies have restructured their corporate finances to fund existing operations and development commitments. Organisations have taken on more debt finance to replace the lack of free cash-flow being generated from existing operations and equity markets are distancing themselves from oil and gas investments. Over the last two years, access to debt has been a blessing for the industry. This has meant some cash-constrained companies have been able to sustain ongoing operations and finance new projects that were committed to before the downturn, while they readjust their businesses in light of lower revenues (see section 5.3 for details on how companies are rationalising their expenditure).

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14 Capital employed – the value of fixed assets employed by the industry.

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