International oil companies (IOCs) are primed for a V-shaped recovery in free cash flow and may generate record figures this year if oil prices average $55 a barrel.
That’s according to analysis from global natural resources consultancy Wood Mackenzie, which highlighted that, at the time of the publication of its report, spot Brent oil prices stood at $67 per barrel.
“Savage cost cuts imposed last year as the global economy contracted in the face of the Covid-19 pandemic saw average IOC corporate cash flow breakevens reduced from $54 per barrel pre-crisis to $38 per barrel,” Tom Ellacott, Wood Mackenzie’s senior vice president of corporate analysis, said in a company statement.
“The record annual losses being announced in the Q4 earnings season serve as a stark reminder that 2020 was one of the toughest years in the industry’s history. But IOCs emerged from the crisis far more resilient to lower prices. The scale of their financial reset has primed the sector for a V-shaped recovery in free cash flow,” Ellacott added.
“At an average price of $55 per barrel, our $140 billion estimate of 2021 free cash flow before shareholder distributions exceeds any previous year since 2006. Free cash flow generation would be double the previous peak if prices jumped to $70 per barrel,” Ellacott continued.
The Wood Mackenzie representative noted, however, that capital allocation priorities will be very different to any previous “up-cycle”.
“We expect companies to continue to plan for the worst, prioritising net debt reduction in redeploying surplus cash flow … Some players will also look to speed up debt reduction by selling non-core assets,” Ellacott said.
“The sector is in ultra-capital-disciplined mode to win over investors … We think the industry will stick to its tight management of investment for some time,” he added.
In the analysis, Ellacott also stated that IOCs must continue repositioning their portfolios for the energy transition.
“Both M&A and organic-led growth in renewables will be on the strategic agenda but disciplined screening criteria will have to apply to new energy investment too if oil and gas companies are to profitably diversify their product mix into low-carbon energy,” Ellacott said.
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