As oil and gas companies plan for 2017, they will need capital discipline and a clean balance sheet to grow – and at least $50 per barrel oil just to hold production flat and be cash-flow neutral, according to a new report from Wood Mackenzie (WoodMac).
“We think we’re starting to see the first signposts of a recovery. We believe the pace of growth of tight oil will really be the biggest wild card in 2017,” said Kris Nicol, WoodMac’s principal analyst for corporate research. “The number one strategic priority is to remain cash-flow neutral, if not generate free cash flow. Cash-flow neutrality is living within your means. You’re not using any debt to fund your day-to-day operations.”
As for growth, Nicol estimated a U.S. independent would need an oil price of $57 per barrel to grow at 5 percent, and a price of $63 per barrel to reach 10 percent and remain cash-flow neutral.
That “is quite some way from above where we are with oil price today and where we think the oil price will be in 2017. So, a return to double digit growth is a long way off for most,” he said.
However, one company stands out as a candidate for solid growth despite low commodity prices. With low leverage on the balance sheet, Irving, Texas-based Pioneer Natural Resources Co. can essentially both fund its own growth and pursue acquisitions, he said.
“They also have the strongest balance sheet. One of the strongest hedging positions as well; on average, about 70 percent of production is hedged [at] roughly around $70 per barrel,” Nicol explained. “Whereas other operators have been unhedged and had the full exposure of sub-$30 oil on their doorstep. So from that perspective, they’ve been in a win-win situation.”
Other companies listed in the report as strong heading into 2017 include Marathon Oil Corp. and Hess Corp. For a long-term perspective, company growth will be based largely on portfolio quality, according to the report. Pioneer, as well as EOG Resources – a major player in the Permian Basin – and Devon Energy Corp. – which has sold $3 billion in assets to realign its portfolio – have potential for a high growth rate under that criteria.
Among those that could remain challenged next year are Chesapeake Energy, still heavily in debt but appears to have staved off bankruptcy, and Southwestern Energy Co., which has planned to lay off 1,100 workers this year.
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