Following what has been described by Wood Mackenzie as “brutal” cost-cutting, will the industry restructure as it did thirty years ago? If sub-US$40/bbl becomes new normal, Tom Ellacott, Wood Mackenzie’s Senior Vice President, corporate upstream, said “a new phase of deep industry restructuring” could be triggered.
As global markets reel in the wake of the oil price crash, he said: “The price collapse could be the trigger for a new phase of deep industry restructuring – one that rivals the changes seen in the late-1990s.”
Ellacott added: “Indebted Lower 48 producers could be forced to act sooner rather than later. This is not the first time we’ve seen a price war – the last was as recently as 2015/16. But this time, oil demand is also weak as the coronavirus outbreak depresses global economic growth. The macro-economic backdrop is completely uncharted waters for oil and gas companies.”
But the oil and gas industry’s financials are in much better shape then they were last time, which he said is thanks to the actions taken following the last price collapse: “There is much less obvious excess spend to cut this time around after five years of disciplined investment and austerity. Raising capital is also much harder now, especially for US Independents, and upstream M&A market activity is at record lows. In addition, many companies have already made the most of the obvious asset sales.”
He estimated that at current activity levels, many companies will need an average Brent price of US$53/bbl to break even in 2020, including dividends at expected current levels and announced buybacks.
But, he added, gearing levels remain high for many players, which will limit their ability to absorb any sustained oil price weakness through the balance sheet.
Elsewhere, Fraser McKay, head of upstream analysis, used Wood Mackenzie’s Lens platform to calculate that up to US$380 billion of cash flow would vanish from forecasts if Brent prices average US$35/bbl for the remainder of the year. This represents an 80 per cent drop relative to a continuation of the US$60/bbl it has averaged year-to-date.
McKay said: “Sustained prices below US$40/bbl would trigger a new wave of brutal cost cutting. Discretionary spend would be slashed, including buybacks and exploration. But given the lack of excess in the system, the cuts to development activity will be necessarily fast and brutal. US tight oil development activity, though not as flexible as many believe, will react immediately. Unsanctioned conventional projects will also be delayed, and in-fill, maintenance and other spend categories scaled-back.”
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