Most companies are currently focused on surviving at US$30/bbl by cutting costs and activity, but the industry also needs to start adapting for the longer term.
Those looking to do more than just survive in 2016 need to fashion portfolios that work at low prices as well as high. A much greater degree of flexibility is required to adjust activity to an uncertain macro outlook. We examine the strategic actions and moves to date in part two of our series ‘Survive, adapt, grow’.
Shaping future upstream portfolios
In our ‘Shaping an upstream portfolio for low prices’ report, we highlight that tight oil has all three attributes that future portfolios need: low-cost, long-life and investment flexibility. This flexibility is integral to rapidly adjusting investment in response to volatile macro conditions.
The adaption process will continue to evolve. We expect that the centre of gravity for most US-listed companies will continue to shift inexorably towards US unconventionals (though some may view the current environment as an opportunity to think counter-cyclically). Larger players will also look to get a greater piece of the action in tight oil.
The adaptation process in action
The Shell-BG deal is a classic example of how early movers are adapting to low prices. The addition of BG's low breakeven Brazilian pre-salt volumes will establish Shell as the leading IOC deepwater player, adding over 500,000 boe/d of production at peak and lowering the aggregate corporate cost curve.
Devon's bolt-on acquisition of early-life, low-breakeven tight-oil assets in the STACK and Powder River Basin is another example. The company was willing to pay a price aligned with 2014 deal valuations in order to strengthen the long-term health of its portfolio. Plans to fund the deal with subsequent asset sales of lower-quality, non-core assets will help to sharpen Devon's focus.
Shifting capital allocation
Tight oil has emerged as a key strategic lever in the response to the downturn. Those that can are rapidly adapting spending strategies, lowering activity and capturing cost deflation. The capital allocation strategies of the US Majors are also shifting towards short-cycle opportunities, in particular in tight oil. As we have seen from its Q4 results, Chevron will not re-enter another capital intensive investment cycle in which multiple complex, high cost developments are running concurrently.
This makes for a fast-moving competitive landscape in 2016. Activity levels will continue to adjust and sustained low prices will spark a new wave of M&A activity as financial distress builds. Some companies will be seeking to take advantage of the adverse market conditions; we look at them in part 3 of ‘Survive, adapt, grow’.
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