Report: Only Three out of Four IOCs Generating Enough Free Cash at $60/bbl

Only three out of the top four international oil companies generate enough free cash flow to cover spending, including shareholder distributions, in a $60/barrel environment, Wood Mackenzie noted. As a result, spending would need to be cut by $170 billion, or 37 percent year-on-year, at $60/barrel to keep net debt flat.

The recent decline in global oil prices has prompted a number of oil and gas companies to cut 2015 spending plans. Marathon Oil Corp. reported Wednesday that it would lower its 2015 capital expenditures by 20 percent due to the sharp decline in oil prices. Other companies such as ConocoPhillips also have adjusted their budgets to reflect lower oil prices.

That same day, Chevron Corp. announced it would put its drilling plans in Canada’s Beaufort Sea on hold due to the economic uncertainty created by lower oil prices. Several Canadian oil producers also reported Wednesday they would slash their 2015 capital budgets, also because of lower oil prices.

The decision by some independents to cut spending indicates that these companies were basing their plans on $70 to 75/barrel assumptions, according to Wood Mackenzie’s Dec. 18 report on oil and gas capital expenditures and merger and acquisition activity.

An estimated $127 billion of global industry greenfield investment in 2015 at risk of referral due to low oil prices, according to a recent report by consultancy Wood Mackenzie. The cuts in spending will likely result in companies focusing on mature, lower-risk plays instead of high-cost, high risk frontier drilling.

Earlier this week, Goldman Sachs reported that $930 billion in future oil and gas investments could be at risk due to low oil prices.

“Operators in an intensive development phase have the least optionality to respond,” said Fraser McKay, principal analyst for Wood Mackenzie’s corporate analysis group, in a Dec. 18 press release. “Most of IOCs [international oil companies] have flexibility to rein in spend to keep finances on an even keel. But shareholder dividends and distributions are likely to be a significant part of the spend cuts for some companies.”

The collapse in oil prices is forcing some companies to shelve merger and acquisitions (M&A) deals underway as hopeful sellers realize they won’t get the offers they would have expected a few months ago. With market liquidity likely to fall, distressed sellers and other opportunities will emerge for cash-rich buyers, said Wood Mackenzie.

Wood Mackenzie doesn’t expect M&A activity to recover until a new “consensus” emerges – typically at least three to six months from the point that prices stabilize, an event which itself is some way off.

“Large-scale corporate consolidation may be closer than it has been at any point since the late 1990s,” said Wood Mackenzie. “History shows that value creation through M&A is largely driven by commodity prices: for buyers that believe in long-term oil above $80-$90/per barrel. 2015 could be a year to go long.”

The shareholder distribution programs of major oil and gas companies also are at risk due to lack of free cash flow in the current oil price environment. Some independents are likely to follow Canadian Oil Sands announcement that it would cut its dividend by around 40 percent, while others will seek to sustain their programs in the near-term. Wood Mackenzie notes that share prices imply $75/barrel Brent long-term after steep falls.

No other companies so far have announced distribution cuts, McKay told Rigzone in a statement. Some companies like Denbury Resources have noted that dividends won’t increase inline with previous plans, however.

“Some of the largest companies may view this as an opportune time to buy back shares, given the low equity valuations and in the near-term at current oil prices, the investment rationale may stack up versus some of their more marginal longer-term investments,” said McKay.

The impact that a company’s decision to scale back on dividends will have on its ratings depends on the scale and type of company. McKay noted that Canadian Oil Sands used to be a royalty trust, and distributions were adjusted to suit its cash flow environment.

“So whilst it will have been a disappointment for investors, they will recognize it as a pragmatic and necessary decision,” said McKay. “The ratio of dividend to CAPEX spend is much higher for them than most operators, hence their need to react first.”

However, the yield available on entry today by new investors in Canadian Oil Sands is exactly the same as the yield available last year due to the fall of the company’s stock price.


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