Wood Mackenzie’s recent corporate analysis in the oil and gas sector shows that 56 companies have cut 2016 exploration and production (E&P) spend by 49 per cent or $230 billion relative to 2014 levels.
The report showed that the 56 companies covered in the corporate analysis will achieve cash flow neutrality at an average oil price of around $50 a barrel Brent in 2016. This is an indication that the industry has a strong ‘survival’ reflex, measured by dramatically tighter cash flow management.
Senior Vice President of Corporate Research at Wood Mackenzie, Tom Ellacott, who described the results as an achievement given that the majority needed over $90 a barrel in 2014, said: “A growing list of companies will even be free cash flow neutral below $40 a barrel in 2016.”
Ellacott explained that the main lever to reduce cash flow breakevens has been deep cuts to capital investment and these have damaged growth prospects.
According to Wood Mackenzie’s research, the aggregate five-year compound annual growth rate (CAGR) for production has fallen from 3.4 per cent at peak in 2014 to only 1.4 per cent in the second quarter of 2016 with the most affected peer group being the focused United States independents, where cutbacks have been the most severe.
According to the analysis, only four companies are expected to grow at double-digit rates between 2015 and 2020. At the other end of the spectrum, nearly 30 companies will be producing less in 2020 than in 2015, the report said.
The report added that the shareholder distributions for the 56 companies have been cut by $59 billion since the oil price collapse.
Other levers including equity issuances and asset sales have also been targeted by many to strengthen finances, the report added.
According to the report, 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.
