Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

Debt finance is also commonly used to help businesses grow. Most, if not all, recent UKCS development projects will have been partially debt-financed and many would not have been able to proceed at all without access to such capital. In fact, a quantum of debt within the financial structure is often healthy for a business’ overall performance. Within a UK context, it should be noted that interest payments on debt are tax deductible against Corporation Tax but not Supplementary Charge. Data on 14 companies operating on the UKCS – a broad sample ranging frommajors to small independents – show that the average net debt to asset ratio has increased by around one-third over the last two years and is now around 20 per cent. The higher leveraging results in an increased reliance on sustainable access to affordable debt and implies greater financial risk. With the levels of net debt growing and the value of equity within oil and gas companies falling, exploration and production companies on the UKCS are becoming more highly geared, with the average gearing ratio 15 rising to 22 per cent from 15 per cent since the start of 2014, as shown in Figure 11. For a number of smaller companies, however, gearing ratios have risen to above 50 per cent.

Figure 11: Gearing Ratios

80

Upper Range Weighted Average Gearing Ratio Lower Range

70

60

50

40

Ratio (%)

30

20

10

0

2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1

Source: Wood Mackenzie

15 A financial ratio that compares borrowed funds to the equity in business defined as: long-term liabilities/(equity + long-term liabilities).

22