After assessing the third quarter results from the major oil and gas companies, Wood Mackenzie, an energy intelligence group, has identified four key themes to look out for in 2016.
Wood Mackenzie says the latest round of earnings results offered the industry an early glimpse at what lies ahead in 2016 in terms of companies’ budgets and strategies. The stand out themes that Wood Mackenzie notes include: weak financial performance in Q3, surging production levels, deep cost cutting; and tighter allocation of limited capital.
Tom Ellacott, Head of Corporate Upstream Analysis at Wood Mackenzie explains: “The crash in oil prices this year is having a transformative impact on the industry. The majors are now making real progress in reshaping their investment strategies for a sustained period of low prices.”
Earnings fall sharply
Upstream earnings were weak for the fourth quarter in succession, the effect of a 50% year-on-year fall in oil prices accentuated by over $9 billion of impairments. Another stellar quarter for refining provided some support, and further reinforced the benefits of the integrated business model.
A strong quarter for production, but growth will flatten out
Production surged as the benefits of the last investment cycle, the impact of low prices on production sharing contract (PSC) volumes and reduced maintenance downtime, flowed through. Total was the top performer, delivering double digit production growth. Eni, Statoil and Shell also had strong quarters. But longer-term growth prospects are starting to suffer from lower investment. Chevron and Total have now downgraded their 2017 production targets and longer-term growth trajectories will be flatter as companies focus on value not volume.
A new phase of cost cutting is under way
Deeper cost cutting was a core theme as the Majors adapt to a scenario of lower oil prices for longer. The aim is to fund dividends through organically generated cash flow. Chevron’s revised capex projection for 2016 – 2017 alone could be up to $17 billion lower than the guidance in its 2015 Analyst Day earlier this year. Spending levels in 2017 could be down by around 30% versus guidance prior to the oil price crash as more projects are deferred and underlying costs continue to fall.
Capital discipline being tightened up
BP provided a barometer of how companies are adjusting planning assumptions in the new world of lower prices, announcing that it is using a mid-teen hurdle rate for major greenfield projects at an oil price of US$60/bbl. Wood Mackenzie expects other Majors to be screening pre-FID projects under similar hurdle rates.
Source: Wood Mackenzie