Widespread upstream cutbacks likely in current climate, analyst warns

March 19, 2020
The global oil and gas industry is back in survival mode as the oil price rout deepens.

Offshore staff

LONDON – The global oil and gas industry is back in survival mode as the oil price rout deepens.

According to Wood Mackenzie, although corporate financials are in better shape than during the 2014/2015 crash, room for further maneuver is limited.

In contrast to the previous oil price collapse, debt and equity markets are virtually closed for US independents, and upstream M&A liquidity too is limited - to survive, there will need to be swift and sharp cuts in investment.

Since the week of March 9, more than one-third of the companies the consultant covers in its Corporate Service have cut capex by 30%, and further cuts will be needed if low prices continue.

Analyst Roy Martin said: “We calculate an average spending cut of 57% will be required for our coverage if only upstream spend is targeted. A reduction of 41% would be needed across all spend categories, including dividends, to be cash flow neutral at $35/bbl.

“Three companies (Occidental, Apache, and Kosmos) have already cut their dividend, freeing up a combined $2.5 billion of capital. We expect more companies to follow suit.

“The majors will use their balance sheets to support current dividends. We believe buybacks will be suspended and some will re-introduce scrip dividends to preserve cash.”

Further radical action will be needed if the low-price situation continues. “Balancing the books at $30/bbl in 2020 is possible for many companies. But tough decisions would be required.

“Over $75 billion in 2020 discretionary E&D capex and $80 billion of shareholder distributions to be cut – breaking a few promises to investors.”