Financial Analysis During the Pandemic and New Consumption: Oil and Gas Sector

Introduction

Initiated in China, the pandemic has reached every continent and records tens of thousands of deaths around the planet, challenging health authorities around the world. Once that the pandemic was announced, in March 2020, given the rapid spread of COVID-19, many countries around the world adopted several public health ways of prevention, including the social distancing, requiring that as part of this prevention, businesses, schools, community centres and every place that could spread the disease should be closed for undetermined time (Fong et al., 2020).

The economic consequences are still unknown and how long it will last is still a challenge to be answered. Many articles describing the response of governments and economic interventions since the beginning of the pandemic, and some of them are still trying to predict what the impact will be on private companies (Brodeur et al., 2020).

Consumption changed drastically because of the social distance. The more people stay in their home, the more they change the way they spend their money. Also, thousands of jobs were jeopardized, and other thousands are not going to be the same for the next years. According to Brodeur et al. (2020), it was already observed a decline in consumer confidence, as well as a fall in fuel sales and higher unemployment insurances. Demirguc-Kunt et al. (2020) also estimated that the social distancing had impact in electricity consumption, nitrogen dioxide emissions and mobility records, causing a 10% decline in the economic activity in Europe and Central Asia countries.

In this scenario, International Energy Agency (IEA, 2020), has indicated an 8% drop in world oil consumption in 2020 and the Agency still predicts pre-pandemic consumption figures will only return in 2023 (considering the best scenario).

We may also remember that the change in consumption habits (electric cars, sustainable products, among others), which was happening before the pandemic, together with the drop in consumption with the pandemic (industries stopped, people doing home office and so on) have caused a perfect storm for the oil sector.

England announced for 2030 a ban on the sale of new cars powered by gasoline or diesel. Japan expects similar restrictions and China wants to have a rule in place in 2035. In the USA, California will have gasoline or diesel vehicles off the market in the same year. The worldwide advance in environmental discussions limits sales and puts pressure on the oil industry.

In a nutshell, falling consumption and rising production are making oil prices one of the lowest in recent years. This scenario has not been favorable to the financial health of these companies in this moment and to the future. Some companies, however, have their financial health with an inverse correlation to the crisis, which means that the economic situation worsens, but these companies improve their financial health. Others have a direct relationship with the crisis, worsening financial health.

Predict companies bankrupt is a challenge, however, in a difficulty economic moment as today, with the effects of COVID - 19 on companies, it is natural to be concerned with increasing the risk of bankruptcy and assessing the financial health of companies.

This context is concerning because the bankruptcy of an oil company may be a huge impact on the economy, since they are large companies, which generate many jobs, tax collection and often political control in the countries where they have been installed.

In order to prevent a financial disaster that we could see to the sector, there is many financial tools that are used to predict companies operating in financial difficulties and has been always a matter of particular interest to many academics, companies, and governments. This type of research on bankruptcy forecasting with accounting data is used by banks and financiers in risk assessment and credit granting.