Oil, Gas Companies Tighten Cash Flow at Expense of Future Growth 2016-07-28

by  Karen Boman |Rigzone Staff |Tuesday, July 26, 2016


The deep cuts oil and gas companies have made to capital investment will enable them to achieve cash flow neutrality. But companies have sacrificed future growth prospects in their focus on cost containment and capital discipline, according to recent analysis by Wood Mackenzie.


The research found that of 56 oil and gas companies found all the companies will achieve cash flow neutrality at an average oil price of approximately $50 per barrel Brent in 2016. A growing list of companies will even be free cash flow neutral below $40 per barrel this year. The companies achieved this goal by cutting exploration and production spend by 49 percent, or $230 billion relative to 2014 levels. As a result, the aggregate five-year compound annual growth rate for production has declined from 3.4 percent at its peak in 2014, to only 1.4 percent in this year’s second quarter.


U.S. independents, who made the most severe spending cutbacks, are the most affected peer group. Wood Mackenzie expects only four companies to grow at double-digit rates between 2015 and 2020. Sweden’s Lundin Petroleum is expected to see the most growth with 31 percent, while almost 30 companies will produce less in 2020 than in 2015.


The other three companies that Wood Mackenzie expects to see double-digit growth from include Range Resources, Pioneer Natural Resources, and Kosmos Energy, Tom Ellacott, senior vice president of corporate research at Wood Mackenzie, told Rigzone. The 30 companies expected to produce less are a mixed bag of companies.


While balance sheet management has been at the forefront of industry’s mind, oil and gas companies will need to move away from survival model and look to the future, said  Ellacott, in a July 26 press statement.


Having adjusted to the new price environment, some companies are seizing the moment with counter-cyclical moves that have repositioned portfolios lower down the cost curve, he said. One example is Exxon Mobil Corp.’s move to acquire Interoil Corp. Ellacott said the acquisition would give Exxon Mobil attractive natural gas resources that could underpin future energy projects.


Ellacott said in the press release that the industry’s smarter capital allocation and efforts to rework projects to reduce costs also are starting to pay off.


Despite some recent high-profile project sanctions, many next-generation projects still fall short of tougher economic screening criteria, particularly in deepwater.


“In the second quarter 2016 results season we’ll be looking for signs of more progress in driving down costs as companies re-engineer developments,” Ellacott stated.


Some oil and gas companies have said that $50 perbarrel is the new magic number that will encourage more drilling or provide the needed lift for cash flow. Earlier this month, Chevron Corp. and BP Plc announced they would move forward with two projects worth $45 billion, a sign that the world’s largest oil companies are regaining confidence to make big investments.