Production to grow modestly — leading tight oil players to outperform
We expect production to grow by an average 2% across our Corporate Service universe — impressive given development spend was slashed by over 40% between 2014 and 2016. All eyes will be on how quickly the US tight oil sector responds to rising prices.
Production declines in US tight oil should bottom out in Q1, and we forecast output to grow by 300,000 barrels per day over the course of 2017. The recovery in volumes will be led by the Permian Basin, with leading players such as Pioneer delivering top-ranked performances on production growth metrics. But International Independent Lundin is on track to grab top spot with another year of stellar growth. Bold, counter-cyclical M&A moves in 2015/2016 will also flow through to out-performance at Range, Shell and Suncor.
Moving beyond survival towards growth
From a corporate perspective, companies will move beyond survival mode after having cut breakevens in half in 2016. Capital discipline and deleveraging will remain dominant themes, but companies will increasingly look for opportunities to adapt and grow, spurred on by OPEC's move to boost prices.
The industry will continue to reposition portfolios lower down the cost curve and, at a more cautious pace, into new energy. The hot oil plays will be US tight oil (the Permian Basin again to the fore) and Brazil pre-salt, both of which have materiality and among the lowest development breakevens globally. Some of the larger players may instead choose to focus on low cost opportunities in resource-rich regions such as Russia and the Middle East.
Improving exploration economics, lower M&A prices and some exciting discovered resource opportunities will help facilitate this shift towards adapt and grow, providing opportunities for the financially strong looking to step up new ventures and business development.