With global markets experiencing the oil price crash, Wood Mackenzie’s Tom Ellacott believes that the price collapse could lead to a new phase of deep industry restructuring, bringing similar changes as those of the late-1990s.
Mr. Ellacott said that the macro-economic backdrop is completely uncharted waters for oil and gas companies. Nevertheless, the oil and gas industry’s financials find themselves in better shape, due to the actions taken after the last price collapse.
Currently, activity levels, Wood Mackenzie estimates that many companies need an average Brent price of $53/bbl to break even in 2020, including dividends at expected current levels and announced buybacks.
However, gearing levels remain high for several actors, affecting their ability to absorb any oil price weakness through the balance sheet.
In addition Fraser McKay, head of upstream analysis, estimated that up to $380bn of cash flow would vanish from forecasts, in case Brent prices average $35/bbl for the rest of 2020. This represents an 80% drop.
As a result, unsanctioned conventional projects will be delayed, and in-fill, maintenance and other spend categories scaled-back. In addition, according to Mr. Ellacot, more highly leveraged players will need to make the deepest cuts to prevent bankruptcy.
Moreover, raising capital is much harder, specifically for US independents, and upstream M&A market activity is at record lows. What is more, there are numerous companies that have already made the most of the obvious asset sales.
