The Q4 results season is now drawing to a close and we can see the survival process is well underway. Many companies are targeting all the levers available to them to free up capital and minimise cash burn. We examine the strategic responses in part one of our three part series ‘Survive, adapt, grow’.
2016 will be about survival for all but the financially strongest. E&P companies must plan for the worst: cash burn will be enormous if current low prices are sustained. Much deeper strategic action is needed to even get close to balancing the books in 2016 at US$30/bbl.
Cost cutting acceleration
Cost cutting is going deep. The first week in February was the biggest week for investment cuts so far: spend for the companies that have reported to date is now down US$62 billion or 22% relative to 2015. Some companies are cutting to the bare bones as capital budgets and production targets are scrutinised.
Shareholder distributions a growing casualty
The scalpel is also being taken to dividends and buybacks. No company is immune at these prices as we’ve seen with ExxonMobil suspending its share buyback programme and ConocoPhillips slashing its once-sacrosanct dividend by 66%. But Total and the other Majors reiterated their commitment to keeping dividends intact.
Cash flow neutrality the focus
For some, cash flow neutrality will remain an aspiration at current prices. But cash flow breakevens for 2016 are starting to fall as multiple cost control strategies take effect. Before the recent actions taken, we estimated the companies in our Corporate Service universe needed US$65/bbl to achieve cash flow neutrality in 2016. Some of these companies have already reduced this to below US$40/bbl. And others will look far better in 2017 as the current investment cycle unwinds: for instance Tullow's cash flow break evens could fall to US$30/bbl in 2017.
These survival efforts are all focused on cash preservation. But more work is needed if companies are to get close to balancing the books at these sort of prices. Some companies will also be turning their attention to how they adapt their portfolios to an uncertain outlook; we look at them in part 2 of ‘Survive, adapt, grow’.
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