Tuesday, December 20, 2016

Oil industry on the cusp of cash flow recovery

The world’s major oil and gas companies will turn cash flow positive for the first time in three years in 2017 if the Opec production cartel succeeds in keeping the oil priceabove $55 a barrel.
That is the conclusion of Wood Mackenzie, the respected energy consultancy, in a new report that portrays an industry on the cusp of recovery from the steep declines in earnings and investment seen since crude prices crashed in 2014.
Deep cost cuts during the downturn, coupled with a gradual rebound in oil prices, were beginning to ease pressure on balance sheets and allow companies to move out of crisis mode, said Tom Ellacott, head of corporate research at WoodMac.
“Most oil and gas companies will start 2017 on a firmer footing, having halved cash flow break-even [point] to survive the past two years,” he said. “Further evidence of a cautious U-shaped recovery in investment should emerge.”
There would be no return to the reckless spending of the $100-per-barrel oil era, WoodMac cautioned; capital discipline would continue to frame corporate strategies in 2017, with much of the benefit from higher prices committed to reducing the heavy debts accumulated during the past two years.
However, the annual report on the outlook for the industry said “2016 will prove to be the low point in the investment cycle” with stronger companies beginning to refocus on growth opportunities, including new exploration and production and mergers and acquisitions.
The industry’s confidence has been bolstered by last month’s agreement by Opec producer nations to curb output. That sent benchmark Brent crude as high as $57 per barrel in recent weeks — more than double the 12-year lows hit last January.
Prices above the $55 level would be enough for the 60 large oil and gas companies covered by the report to collectively generate positive cash flow — earning enough money to cover outgoings — for the first time since 2014 when the oil price started falling.
Recovery would be led by independent US oil and gas companies, which WoodMac said could increase investment by more than 25 per cent if prices averaged above $50 per barrel in 2017. However, investment by large international groups such as ExxonMobil and Royal Dutch Shell would continue to fall — by a further 8 per cent — as capital-intensive projects approved before the price crash wind down. Mr Ellacott said investment would focus on lower-cost resources such as the Permian Basin in the US and the so-called “pre-salt” offshore fields of Brazil.
“Mergers and acquisitions will also offer an attractive value proposition for the financially strong prepared to take a bullish view on long-term prices,” he added. “Low-cost, low-risk discovered resource opportunities will look attractive again. And the larger players will need these to ensure long-term portfolio renewal.”
Oil and gas production from the 60 companies covered by the report — including international majors, national oil companies and independents — would increase by an average 2 per cent in 2017. This signalled improved productivity given that development spending on new resources has fallen more than 40 per cent since 2014.
Further commitments to renewable energy were likely next year as companies begin positioning themselves for a long-term shift away from fossil fuels, the report said. However, scarce capital and improving returns from oil and gas meant these were likely to remain “small steps”.

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