As we move into planning season spot oil prices waver in the US$30/bbl to US$40/bbl range. The focus for many companies is survival as they prepare for a prolonged period of uncertainty. Going into 2016, the 40 largest IOCs required an average Brent price of US$65/bbl in order to remain cash flow neutral this year.
Now, this needs to come down further. But how much further can companies go and what strategies are available to achieve cash flow neutrality? We have analysed the largest 40 IOCs and outlined which are best placed to cope with US$30/bbl oil.
Those that can are cutting again. Total capital spend in 2016 is set to fall 24% year-on-year, but this does not go far enough; especially if shareholder distributions are untouched. As we highlighted in this featured report Survival in 2016 – what upstream spending cuts are required?, dividends and buybacks are no longer sacrosanct. Only the Majors (Eni aside) and the strongest Independents are holding out. For some, the actions announced so far this year have lowered the average 2016 cash flow breakeven towards US$40/bbl.
Austerity measures have hardened across the board, but not all have the flexibility or desire to cut. Many will look to asset sales and equity issuances to shore-up balance sheets, and underpin ongoing investment programmes. As the economics become tighter companies that have already cut to the bone will need to look elsewhere.
Borrowing more is a strategy that some will seek to employ, but access to debt is becoming more challenging. This is particularly true for highly geared companies susceptible to credit rating downgrades. But the Majors and the largest Independents will still be able to access to new debt with little noticeable difference in rates.
We expect pragmatism to win over optimism. Most of the companies in our coverage have at least one of three critical attributes: 1) investment flexibility, 2) near-term liquidity or 3) continued access to capital markets. Capital discipline, cost reduction and efficiency can only go so far, as ever, increasingly extreme market conditions will fuel M&A activity.
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