New year may bring better times for global oil and gas, says analyst Wood Mackenzie – if last month’s decision by the Organization of Petroleum-exporting Countries (OPEC) to cut production drives oil prices above US$55 per barrel.
If that happens, global oil and gas firms “will turn cashflow positive for the first time since the downturn”, Wood Mackenzie predicts.
Oil and gas companies have had to halve their cash flow break-evens to survive the past two years, says Wood Mackenzie senior vice-president corporate analysis research Tom Ellacott. “Further evidence of a cautious, U-shaped recovery in investment should emerge,” he says.
Here are five reasons why 2017 may be a much happier new year for global oil and gas producers:
Oil and gas firms strengthen their finances
Strengthening finances remains the priority. Capital discipline, cost reduction and deleveraging will frame corporate strategies. But oil and gas firms will look back at 2016 as the low point in the investment cycle, as they gain confidence from the OPEC’s pledge to cut production.
"Overall, 2017 will be a year of stability and opportunity for oil and gas companies in positions of financial strength. More players will look at opportunities to adapt and grow their portfolios," Mr Ellacottt predicts.
US independents lead a new investment cycle
The US independents will respond first to rising prices after Donald Trump is inaugurated as POTUS45 on January 20. Emboldened by a new administration committed to exploiting domestic oil and gas, operators in the Lower 48 states have three core competitive advantages: access to capital; cost-advantaged portfolios; and flexibility to scale back spend sharply if prices stay low.
Wood Mackenzie expects the US independents to increase investment by more than 25 per cent if oil prices average above US$50/ barrel. However, the analyst also expects bigger players to continue to cut their spend – with total investment by industry majors down 8 percent as they wind down recent capital-intensive projects.
Portfolios adapt, moving down the cost curve and into new energy
Wood Mackenzie says: "More companies will strive to adapt by positioning portfolios lower down the cost curve. The hot oil plays are US tight oil, with the Permian Basin to the fore, and Brazil pre-salt. Both have materiality and development break-evens among the lowest globally. Renewables exposure will continue to build, though scarce capital and improving returns from upstream suggest small steps in 2017 rather than transformational moves."
Production grows modestly, despite past capex cuts
Wood Mackenzie forecasts expects that the 60 companies its corporate service monitors to increase their production by an average of 2 per cent – impressive, given the 40 per cent cut in development spend between 2014 and 2016.
It says: “A selection of international independents and leading US unconventional players will deliver top-ranking performance on production growth metrics. However, savage investment cuts, asset sales and low prices will take their toll with 23 players experiencing declining volumes in 2017.”
The value proposition improves for exploration and mergers and acquisitions
Improving exploration success rates and full-cycle returns will continue next year, Wood Mackenzie predicts. It expects more majors and national oil companies to accelerate new ventures. However, it also sees mergers and acquisitions as “an attractive value proposition for the financially strong prepared to take a bullish view on long-term prices.”
"Low-cost, low-risk discovered resource opportunities will look attractive again,” Mr Ellacottt concludes. “And the larger players will need these to ensure long-term portfolio renewal as part of a more balanced growth strategy."