From collapsing oil prices to widespread cost-cutting, we assess the themes that will shape the upstream corporate landscape.
1. The financial strain of low oil prices
Lower oil prices pose the biggest threat to oil and gas industry earnings and financial solidity since the crash of 2008. Financial performance in Q1 will deteriorate as the impact of a full quarter of low price realisations flows through to earnings.
Crude hedging programmes and integration will provide temporary protection for some for a quarter or two; as will lagged oil index LNG and European gas contracts which will start to adjust to December/January crude prices by Q3.
2. Debt management is a critical priority
The fall in revenue will be exacerbated by higher net debt across much of the sector which has risen by 20% (US$53 billion) for the 46 International Oil Companies in our Corporate Service since 2010.
The cost of new capital for smaller companies will rise sharply in 2015. Asset write-downs will lead to higher leverage ratios and increased financial stretch for some companies. Refinancing could prove difficult in certain cases and covenants based on reserves, cash flow and market cap ratios could come into play.
3. Cost cutting will be intense
The industry will plunge into full-on capital discipline. We estimate companies need to cut costs by US$170 billion or 37% to maintain net debt at 2014 levels at US$60/bbl Brent. This will be felt across new project investment, exploration budgets, operating costs and shareholder distributions.
Some US$112 billion of spend on pre-Final Investment Decision (FID) projects is vulnerable to being pushed out and a further US$145 billion in 2016. Total investment of US$1.2 trillion in this suite of new projects during this decade could contribute over 7.8 million b/d of liquids alone to global supply by 2020. Only the most economically robust projects will proceed, leading to a tighter oil supply/demand balance in a few years.
4. Potential buyer's market in M&A
Distressed sales could precipitate the emergence of a true buyer's market in 2015. Financially strong players will put rationalisation programmes on hold but some companies will find themselves with little choice but to sell, unable to achieve the cuts in discretionary spend required to balance the books.
Large scale consolidation is now more likely than any point since the late-1990s. History shows that value creation through M&A is largely driven by commodity prices – for buyers who believe in long-term oil above US$80-90/bbl, 2015 will be a year to go long.
5. A golden opportunity for long-term resource capture?
It will not be a vintage year for exploration but a window of opportunity will open to capture high-impact acreage and discovered resource opportunities.
Exploration budgets will nosedive and new ventures will be the smart thing to focus on. Specialists explorers will continue to retrench under intense financial pressure and some will become acquisition targets for players short on high-impact acreage. It could be an opportune time for National Oil Companies to get more active in exploration whilst financially strong Majors and Independents will focus on the capture of high-potential acreage at low cost.
Corporate themes: What to look for in 2015 [Subscription required]
Global Upstream M&A: 2014 in review and what to look for in 2015 [Subscription required]
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