As global markets reel in the wake of the oil price crash, Wood Mackenzie’s Tom Ellacott 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.”
“Indebted Lower 48 producers could be forced to act sooner rather than later,” Mr Ellacott added. “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.”
However, the oil and gas industry’s financials are in much better shape, thanks to the actions taken following the last price collapse.
“At current activity levels, we estimate that many companies need an average Brent price of $53/bbl to break even in 2020, including dividends at expected current levels and announced buybacks,” Mr Ellacott said.
But gearing levels remain high for many players, limiting their ability to absorb any sustained oil price weakness through the balance sheet.
Fraser McKay, Head of Upstream Analysis, used Wood Mackenzie’s Lens platform to calculate that up to $380 billion of cash flow would vanish from forecasts if Brent prices average $35/bbl for the remainder of the year. This represents an 80% drop relative to a continuation of the $60/bbl it has averaged year-to-date.
“Sustained prices below $40/bbl would trigger a new wave of brutal cost cutting,” Mr McKay said. “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,” Mr McKay added.
“More highly leveraged players will be forced to make the deepest cuts to stave off bankruptcy,” Mr Ellacott said. “Aggregate cash burn from the companies we cover in our Corporate Benchmarking Tool amounts to $130 billion in 2020 in the $35/bbl Brent scenario.”
“There is much less obvious excess spend to cut this time around after five years of disciplined investment and austerity,” Mr Ellacott added. “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.”