Wood Mackenzie's recent analysis of corporates in the oil and gas sector shows the industry has a strong ‘survival‘ reflex, measured by dramatically tighter cash flow management. Fifty-six companies covered in Wood Mackenzie's corporate analysis will achieve cash flow neutrality at an average oil price of around US$50 a barrel Brent in 2016.
"This is some achievement given the majority needed over US$90 a barrel in 2014," says Tom Ellacott, senior vice president of corporate research at Wood Mackenzie. "A growing list of companies will even be free cash flow neutral below US$40 a barrel in 2016."
Deep cuts to capital investment have damaged growth prospects
Ellacott explains the main lever to reduce cash flow breakevens has been deep cuts to capital investment and these have damaged growth prospects. The 56 companies have cut 2016 exploration and production (E&P) spend by 49% or US$230 billion relative to 2014 levels.
According to Wood Mackenzie's research, the aggregate five-year compound annual growth rate (CAGR) for production has fallen from 3.4% at peak in 2014 to only 1.4% in Q2 2016; the most affected peer group is the focused US Independents, where cutbacks have been the most severe.
Only four companies are expected to grow at double-digit rates between 2015 and 2020. Lundin Petroleum, a Swedish independent E&P company with a stake in Norway's giant Johan Sverdrup oil development, ranks a clear first with 31%. At the other end of the spectrum, nearly 30 companies will be producing less in 2020 than in 2015.
Shareholder distributions for 56 companies cut by US$59B
Shareholder distributions for the 56 companies have been cut by US$59 billion since the oil price collapse. Other levers including equity issuances and asset sales have also been targeted by many to strengthen finances.
Balance sheet management is front of mind
"Balance sheet management is front of mind across the industry – cost containment and capital discipline are still the strident messages emanating from all companies. But strategies will need to shift away from survival mode and look to the future," says Ellacott.
The industry needs to move into the next phase to sustain the business. A return to free cash flow generation will breathe confidence back into the sector. Costs are also falling and project economics improving as the industry resets itself to operate at lower prices.
Smarter capital allocation and efforts to rework projects to reduce costs are paying off
"Oil and gas companies' investment strategies are now starting to adapt to the new price environment. Some have seized the moment with counter-cyclical moves that have repositioned portfolios lower down the cost curve," says Ellacott.
Ellacott adds that smarter capital allocation and efforts to rework projects to reduce costs are also starting to pay off. "But it is too early to call the start of the next investment cycle, despite some recent high profile project sanctions. Many next-generation projects still fall short of tougher economic screening criteria, particularly in deepwater."
"In the Q2 2016 results season we'll be looking for signs of more progress in driving down costs as companies re-engineer developments," says Ellacott.