The Edge

How the Majors will emerge stronger from the downturn

1 minute read

Upstream repositioning – from cyclical to secular

Low oil prices, severe financial stretch, even moments of existential contemplation – it’s hardly been the right environment for successful business development. But that’s exactly what’s been happening over the three years since the oil price crash. The Majors have seized the moment in the downturn to reposition by stealth.

The result is a notable turnaround in prospects, against the odds – high-graded portfolios, improved production profiles and more resilient future cash flows. How have they done it? Tom Ellacott, Head of Corporate Research, identifies five different business development initiatives.

First, by selling non-core, typically low margin or peripheral upstream assets.

Disposals of Canadian oil sands (Shell) and mature assets (Shell, ExxonMobil, Total) have comprised the bulk of the US$27 billion sold by the Majors since 2014. Leverage ratios, which peaked in 2016, are heading down again.

Second, new organic investment.

The Majors have dominated final investment decisions for new projects since 2014, accounting for two-thirds of reserves sanctioned. Big gas projects (ENI, BP) have been a feature of recent development approvals.

FIDs are happening because of lower costs, much of it cyclical but with structural elements; project re-scoping and re-engineering are showing the way forward.

More work though is needed to propagate a pipeline of big commercial deep water projects.

Chevron, Shell and ExxonMobil also have material exposure to US tight oil and are all ramping up spend. Tight oil and unconventional gas will become increasingly important to these three companies – contributing at least a quarter of ExxonMobil’s total output by the mid-2020s.

Third, targeted acquisitions.

Deals have varied in scale, geography and resource theme but have common traits: bolstering existing portfolio strengths and typically low breakeven/long life assets.

Shell/BG is the one big transaction (US$82bn), positioning Shell in prime Brazil oil projects and expanding its LNG business. ExxonMobil has been busiest – BOPCO elevated its modest Permian exposure to a leading growth platform. PNG and Mozambique are long-life, and broaden the company’s options for medium-term LNG development.

Other deals are opportunist, in the main infill, but equally indicative of direction of travel. Maersk consolidates Total’s core conventional North Sea presence with high margin assets on which there is scope for unit cost reduction.

Fourth, exploration.

ExxonMobil has been the stand out performer, notching up a new oil province no less (five discoveries in Guyana, over 2.5 bn bbls, project breakeven US$52/bbl, NPV, 15). The wider industry’s lack of appetite for conventional exploration leaves the door wide open for the Majors to reload portfolios.

ExxonMobil, Total, Statoil and ENI have acquired vast positions in under-explored basins during the downturn, much of it with low commitments – providing optionality for medium-term resource renewal.

Fifth, accessing discovered resource opportunities (DROs).

IOCs bid to develop and produce existing large, long-life oil or gas fields, negotiating terms with the host government. Total (Abu Dhabi, Iran), BP (Abu Dhabi, Azerbaijan), Chevron, ExxonMobil and Statoil (Azerbaijan) have all signed concessions in the last three years.

Our analysis suggests returns from DROs awarded since 2014 are pretty attractive, in some cases better than can be achieved through M&A. This may indicate the downturn has shifted negotiating power towards the operator.

We’d go as far as to say a secular shift is underway. The initial impetus for upstream repositioning may have been cyclical, a response to the financial squeeze. But it’s seguing into a strategy.

We are witnessing the early stages of the industry preparing for the long haul – the challenges of the energy transition and the attendant risks of peak oil demand, disruption from renewables and EVs, and perhaps sustained pressure on oil and gas prices.

The Majors have used the downturn to their advantage and others need to follow their lead. Asian NOCs, among others, face steep declines in production within a few years. They need to build for the future, and start soon before the window of opportunity closes.

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