Oil and gas firms adapting to lower prices

Wood Mackenzie’s recent analysis of corporates in the oil and gas sector shows the industry has a strong survival reflex. This is measured be a significantly tighter approach to cash flow. 56 companies in the analysis will achieve cash flow neutrality at an average oil price of around US$50 a barrel.

Tom Ellacott, senior vice president of corporate research at Wood Mackenzie said:

"This is some achievement given the majority needed over US$90 a barrel in 2014. A growing list of companies will even be free cash flow neutral below US$40 a barrel in 2016."

Ellacott went on to explain that the main lever to reduction of cash flow break even are significant cuts to capital investment. The 56 companies have cut 2016 exploration and production spending by 49% or US$230 billion on 2014 levels. Only four of the respondent companies are expected to grow in double-digit rates between 2015 and 2020. At the other end, nearly 30 companies will be producing less in 2020 than in 2015.

Ellacott said:

"Balance sheet management is front of mind across the industry – cost containment and capital discipline are still the strident messages emanating from all companies. But strategies will need to shift away from survival mode and look to the future. 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.” "Oil and gas companies' investment strategies are now starting to adapt to the new price environment. Some have seized the moment with counter-cyclical moves that have repositioned portfolios lower down the cost curve."

"But it is too early to call the start of the next investment cycle, despite some recent high profile project sanctions. Many next-generation projects still fall short of tougher economic screening criteria, particularly in deep water. In the Q2 2016 results season we'll be looking for signs of more progress in driving down costs as companies re-engineer developments."