BAKU, Azerbaijan, March 1
By Leman Zeynalova – Trend:
Companies can cope with low oil prices, but are highly leveraged to oil price recovery, Trend reports citing Wood Mackenzie.
“The industry primed itself for recovery, acting fast and hard in the crisis of 2020 to reset the cost base. By cutting distributions to shareholders, investment and operating costs, IOCs reduced the Brent price needed for cash flow to break even from US$54/bbl a year ago to US$38/bbl in 2021. Companies can now cope with low prices; but are also highly leveraged to the oil price recovery that’s underway. There’s a juicy cash flow margin at today’s Brent price of over US$65/bbl, and pure upstream players with undiluted leverage to higher oil and gas prices should benefit most.
We think a fall below US$55/bbl is unlikely this year with the global economy recovering and oil market fundamentals continuing to improve,” the company said.
The biggest risk is the oil price falling back and the effect on upstream, according to Wood Mackenzie.
“But we think a fall below US$55/bbl is unlikely this year with the global economy recovering and oil market fundamentals continuing to improve. The rest of the value chain could be a drag for integrated companies. Refining is still suffering from chronic overcapacity and low margins will persist for some time yet. With mobility restricted, retail sales are still well below normal.”
Oil and gas companies are recidivists, quick to start investing in growth at the first glimmer of oil price recovery in any cyclical upturn, said the company.
“But this upcycle is different, in that the industry grasps why investors have been disenchanted. Companies are keenly aware they need to prove that they can deliver on returns and cash generation to win back investors’ confidence.
Most will use any spare cash flow after dividends to pay down debt and bolster financial resilience. Leverage blew out to 44% at the end of Q3 (excluding operating leases) from just 15 percent a decade ago and will be higher still at Q4 (some companies have yet to report). It’ll take over three years of organic cash flow at US$55/bbl to get leverage down to 20 percent, what we’d argue is a comfortable level, sooner at US$70/bbl.”
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