A 37% drop in spend across the sector will be needed relative to 2014 to maintain current debt levels if Brent remains at $60 per barrel in 2015, according to Wood Mackenzie’s latest outlook. This is in addition to the $9 billion cuts announced by companies in the last few weeks.
“Operators in an intensive development phase have the least optionality to respond,” explained Fraser McKay, principal analyst for Wood Mackenzie’s corporate analysis. “Most other international oil companies (IOCs) have flexibility to rein in spend to keep finances on an even keel. But shareholder dividends and distributions are likely to be a significant part of the spend cuts for some companies.”
Collapsing oil prices are also throttling the mergers and acquisitions (M&A) market, as deals under way are being shelved and would-be buyers are melting away. Hopeful sellers will not get the offers they would have expected just a few months ago. According to Wood Mackenzie, M&A will not recover until a new “consensus” emerges – typically, at least three to six months from the point that prices stabilize (itself, some way off).
Meanwhile, uncertainty and corporate distress create opportunities for companies with the appetite and capacity to take advantage.
Below are the key points of Wood Mackenzie’s outlook:
- At $60/per barrel, only three out of the top 40 IOCs generate sufficient free cash flow to cover spend including distributions. Some independents have already cut 2015 discretionary spend, indicating $70-75/per barrel assumptions. Spend would need to be cut by $170 billion or 37% year-on-year at $60/per barrel to keep net debt flat.
- Shareholder distributions are under pressure at current oil prices. Buy-backs: Majors’ programs at risk due to lack of free cash flow. Dividends: Some independents likely to follow Canadian oil sands and cut; others will seek to sustain in the near term. Market ratings: Share prices imply $75/per barrel Brent long term after steep falls.
- Strategic themes: Impact on investment, exploration and M&A. Pre-FID projects: $127 billion of global industry greenfield investment in 2015 at risk of deferral. Exploration: Mature, lower-risk plays will draw spend from high-cost, high-risk frontier.
- M&A: Market liquidity likely to fall; distressed sellers and other opportunities will emerge for cash-rich buyers. Large-scale corporate consolidation may be closer than it has been at any point since the late 1990s. History shows that value creation through M&A is largely driven by commodity prices: for buyers that believe in long-term oil above $80-90/per barrel, 2015 could be a year to go long.
Luke Parker, principal analyst for Wood Mackenzie’s M&A analysis, notes, “Weak oil prices through 2015 will ratchet up the pressure on the most financially stretched in the sector. Expect to see falling deal valuations and the emergence of a true buyers’ market.”