Oil and gas industry close to getting a grip on its cash flow problem

The oil and gas industry will turn cash flow positive for the first time in three years – as long as OPEC production cuts drive oil prices above $55 a barrel.

A new report from the respected energy consultancy Wood Mackenzie suggests the sector is close to recovery after being hampered by drops in earnings and investment when crude prices crashed in 2014.

The company’s report, called Corporate themes: 5 things to look for in 2017, assesses next year’s prospects for majors, independents and national oil companies, finding that:

Strengthening finances will be a top priority.
US independents will lead the sector into a new investment cycle.
Portfolios will adapt, down the cost curve and into new energy.
There will be modest growth in production despite past capex cuts.
Plus an improved value proposition for exploration and mergers and acquisitions.

Tom Ellacott, senior vice president of corporate analysis research at Wood Mackenzie, said most oil and gas companies will start 2017 on a “firmer footing”, having halved cash flow break-evens to survive the past two years. “Further evidence of a cautious, U-shaped recovery in investment should emerge,” he said.

The report identifies US independent oil and gas firms as leading the charge. They will be “emboldened” by a new Trump administration committed to exploiting domestic oil and gas resources and will benefit from having access to capital, cost-advantaged portfolios and flexibility to scale back if needed.

Wood Mackenzie analysis suggests that US independents could increase investment by more than 25 per cent should oil prices stay above $50 a barrel.

"Overall 2017 will be a year of stability and opportunity for oil and gas companies in positions of financial strength. More players will look at opportunities to adapt and grow their portfolios," Mr Ellacott added.

"More companies will strive to adapt by positioning portfolios lower down the cost curve. The hot oil plays are US tight oil, with the Permian Basin to the fore, and Brazil pre-salt. Both have materiality and development breakevens which are among the lowest globally.

“Renewables exposure will continue to build, though scarce capital and improving returns from upstream suggest small steps in 2017 rather than transformational moves."

Previous post

Major pension fund managers make Estonia forestry investment

Next post

Investment in London commercial property reaches £17bn