Oil companies will have to engage in brutal cost-cutting if prices remain at dramatic low - Wood Mackenzie

Oil companies will have to engage in brutal cost-cutting if prices remain at dramatic low – Wood Mackenzie

Mar 10, 2020 News

Wood Mackenzie’s Senior Vice President for Corporate Research, Tom Ellacott is of the firm view that the worrying oil price crash could be the trigger for a new phase of deep industry restructuring—one that rivals the changes seen in the late-1990s.
In a statement to the press, Ellacott reminded of the current oil price war between Russia and Saudi Arabia while stating that this is not the first time such has happened. He noted, however, that this time, oil demand is weak because of the coronavirus outbreak.
For those who may not be aware, China is the world’s largest oil and gas importer, and due to the outbreak, there is an oversupply in the market, which has led to oil prices declining since mid-January. The price war between Russia and Saudi stems from the former’s refusal to join OPEC in the cut back of production supply so as to stabilize prices on the world market which have plummeted to a worrying US$34 a barrel.
Ellacott said that the macro-economic backdrop is completely uncharted waters for oil and gas companies. But he noted, however, that the oil and gas industry’s financials are in much better shape, thanks to the actions taken following the last price collapse.
“At current activity levels, we estimate that many companies need an average Brent price of US$53/bbl to break even in 2020, including dividends at expected current levels and announced buybacks,” he said.
Fraser McKay, Head of Upstream Analysis, used Wood Mackenzie’s Lens platform to calculate that up to US$380 billion of cash flow would vanish from forecasts if Brent prices average US$35/bbl for the remainder of the year. This represents an 80% drop relative to a continuation of the US$60/bbl it has averaged year-to-date.
McKay said, “Sustained prices below US$40/bbl would trigger a new wave of brutal cost-cutting. Discretionary spending would be slashed, including buybacks and exploration. But given the lack of excess in the system, the cuts to development activity will be necessarily fast and brutal…Unsanctioned conventional projects will also be delayed, and in-fill, maintenance and other spend categories scaled-back.”
Adding to his point, Ellacott said, “More highly leveraged players will be forced to make the deepest cuts to stave off bankruptcy… In addition, many companies have already made the most of the obvious asset sales.”

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