WoodMac sees US independents seeking cash-flow neutrality

Independent operators are likely to remain cautious while setting 2017 budgets, said WoodMackenzie Ltd. analysts, adding that higher oil prices are needed before independents are willing to commit to investments that would meaningfully boost production growth.

“The pace at which tight oil rebounds is one of the biggest wildcards impacting near-term oil prices,” WoodMac said. “Unless oil prices rebound to $60/bbl, a return to double-digit production growth is still some way off for most.”

Analysts see independents striving for cash-flow neutrality, which means financing daily operations without taking on external debt. Capital discipline remains a priority.

WoodMac believes some companies could finance 10% production growth while staying cash-flow neutral if light, sweet oil prices were to stay above $60/bbl on the New York Mercantile Exchange.

Kris Nicol, WoodMac principal analyst for corporate research, said, “We estimate that our peer group of the 17 largest US independents requires an average of $50/bbl West Texas Intermediate in 2017 to be cash-flow neutral and replace production declines.”

He estimates oil would have to trade at $57/bbl for companies to increase production at 5% and $63/bbl for companies to increase production 10%.

Meanwhile, a continued production decline is likely if companies maintain current levels of spending. “We estimate that half of the companies’ production would decline if capex remained flat from 2016 to 2017,” Nicol said, adding several companies require more than 40% spending increases just to offset production declines.

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