CASH FLOW DOWN
Rapid and aggressive strategic response by oil and gas companies to low oil prices has driven industry cash flow breakevens down by $20/bbl to $72/bbl, according to a recent analysis of Wood Mackenzie. If oil prices remain at current levels, further cuts would be required to achieve cash flow neutrality, WoodMac said. For some companies, this will mean selling assets, others may suspend or limit dividend and buyback programs.
"Capital cost-cutting has been both rapid and in some cases dramatic. Individual companies have had one, two, and sometimes three bites at the cherry, and industry has for the time being settled on a 24% or $126 billion fall year-on-year. Dividends and share buyback programs have also been targeted, while companies have turned to both the debt and equity markets to boost liquidity," explained Tom Ellacott, head of corporate upstream analysis for WoodMac.
"Two peer groups are particularly interesting: for the majors, cutting or suspending buybacks have been the key levers which have contributed to a 25% reduction in cash flow breakevens. For the smaller North American onshore players, the ability to rapidly dial-back spend has been a key competitive advantage. Some players have cut costs by up to 80%, and these companies join a select group with cash flow breakevens below $60/bbl," Ellacott said.
While stock market performance indicates that investors believe there will be an oil-price recovery, a sustained period of low oil prices at $60/bbl will need further measures to conserve cash. "More cuts to dividends and buybacks are likely if $50-60/bbl prices persist," Ellacott said.
He also pointed out that low prices will trigger large-scale mergers and acquisitions and there are opportunities for the financially strong, as evidenced by Royal Dutch Shell PLC's recent $70 billion offer for BG Group PLC.
WoodMac's analysis shows there is a huge inventory of assets on the market, with 340 potential deals worth over $300 billion. But activity has collapsed.
"Buyer and seller expectations remain far apart, and buyers of material size are limited to the most financially secure. But a buyer's market in M&A might emerge as companies are forced to sell assets to balance the books. The $300 billion question is: with Shell having made the first move, who will follow?" Ellacott explained.
Ellacott said, "Investors will be watching the upcoming first-quarter results season for indications of how effective the reaction to oil prices at below $60/bbl has been. Companies are facing a choice of paring-back investment or maintaining momentum throughout the cycle, depending on their financial position. There is a high degree of optionality regarding planned spend in 2016 and 2017, much of which is discretionary. How companies react to this strategic challenge will affect their production growth and positioning in the future."
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REUTERS - Brent crude futures LCOc1 were down 72 cents at $61.49 per barrel at 1020 GMT, having fallen by 1.5 percent on Tuesday, its largest one-day drop in a month. U.S. West Texas Intermediate (WTI) crude CLc1 was at $55.12 per barrel, down 58 cents.
BLOOMBERG - Prices dropped during the session as the International Energy Agency said the recent recovery in oil prices, coupled with milder-than-normal winter weather, is slowing demand growth. The worsening outlook for consumption dampened some of the enthusiasm that OPEC and its allies will extend supply curbs.
Global energy needs rise more slowly than in the past but still expand by 30% between today and 2040. This is the equivalent of adding another China and India to today’s global demand.
Product exports have grown significantly over the past several years and are expected to continue to grow as Russian refineries add capacity to produce more high-quality products.