Open Eyes Opinion
North America Oil and Gas
Lower Price Scenario Paints Gloomy Outlook for North American Oil and Gas Companies; Additional CAPEX Cuts Required, IHS Says
Cuts of nearly 50 percent needed to align spending with cash flow – These spending cuts will be particularly troublesome for the highly leveraged companies
According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, which assessed the impact of lower oil and gas prices on 2016 cash flow estimates for the North American E&P peer group, under the IHS low-case scenario, to maintain a capital spending-to-cash-flow ratio in the historical range of approximately 130 percent, spending for the E&Ps would need to be cut by a further $24 billion, or 30 percent, from the most recent estimates.
This would be a cut of almost 50 percent from 2015 spending levels. IHS reports the current capital spending estimate for the group totals more than $78 billion, which is 23 percent lower than an estimated $101 billion in 2015.
“Our analysis strongly suggests that additional steep spending cuts are required by this peer group of 44 North American E&P companies in order to bring spending in line with lower projected cash flows,” said Paul O’Donnell, principal analyst at IHS Energy and author of the analysis. “Given that most companies made preliminary 2016 spending plans when the price outlook was comparatively higher, we expect to see further spending cuts announced throughout the fourth-quarter 2015 earnings cycle that reflect the current price environment.”
Under the IHS 2016 low-case price scenario, which assumes $40 per barrel of oil and $2.50 per thousand cubic feet(MCF) of gas, and is closer to current market conditions, IHS projects that the North American E&Ps will spend 188 percent of cash flow. This projection compares with a ratio of 133 percent under the IHS 2016 base-case scenario, which assumes a $50 per barrel of oil and $2.75 per MCF.
In the low-case scenario, the large E&Ps are projected to outspend cash flow by the greatest amount, equal to 195 percent of cash flow. These large E&Ps are the least hedged of the companies studied, making them more exposed to price fluctuations, but they also have the strongest balance sheets, offering a financial cushion, IHS said.
Despite their comparatively stronger hedging positions, as noted in the recent IHS hedging analysis, the small E&Ps are projected to spend 174 percent of cash flow, which “will be problematic since they already have highly leveraged balance sheets and cannot afford further balance sheet deterioration,” O’Donnell said. “The result could be forced asset sales at bargain prices, sizeable staff layoffs and, in the worst cases, bankruptcies,” he said.
Under the lHS low-case scenario, for the group to show real spending discipline and live within cash flow, IHS said, annual spending would have to be reduced by at least 64 percent compared with 2015, or by 42 percent under the IHS base case assumptions.
“These spending cuts will be particularly troublesome for the highly leveraged companies,” O’Donnell said. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.”
The IHS high-case scenario assumes $60 per barrel of oil and $3 per MCF of gas, but “given current prices,” O’Donnell said, “even our low-case scenario could be generous. Under our low-case scenario, we expect 2016 capital spending for the group will exceed cash flow for all companies, with the large and small peer groups spending 195 percent and 174 percent of cash flow respectively, compared with a slightly more conservative 157 percent for the midsize E&P companies.”
In this volatile market, IHS said its analysis indicates that Concho Resources, Whiting Petroleum, WPX Energy, Halcón Resources and PDC Energy are displaying the greatest spending discipline.
To speak with Paul O’Donnell, please contact Melissa Manning at email@example.com.
For more information on the IHS Energy Company and Transaction Research, please contact firstname.lastname@example.org.
IHS CERAWeek 2016
The industry’s response to volatility and uncertainty in a time of low oil prices; a look at what’s ahead for markets, investment, and costs and technology will be key themes explored at IHS CERAWeek 2016, which will be held February 22-26, 2016, at the Hilton Americas Hotel in Houston. In addition, speakers at the event will address the environmental agenda, including climate policy and responses to the COP 21 climate conference in Paris; the changing structure of the electric power industry; prospects for renewables; emerging competitive strategies and industry structure; and regulatory policy and geopolitics.
IHS CERAWeek is recognized as a leading forum offering insight into the energy future. Chaired by Daniel Yergin, IHS CERAWeek 2016 — Energy Transition: Strategies for a New World will mark the event’s 35th anniversary and will convene more than 2,800 delegates from more than 50 countries and more than 300 speakers to provide fresh insights and critically-important dialogue on the most urgent issues and realities to be faced in energy markets, technologies and geopolitics.
The Minister of Petroleum and Mineral Resources of Saudi Arabia, Ali bin Ibrahim Al-Naimi, will deliver a special address during the 35th IHS CERAWeek, although the exact date and time of Minister Al-Naimi’s IHS CERAWeek 2016 address is yet to be determined. He will join a distinguished group of speakers that will include U.S. Secretary of Energy, Ernest Moniz; EPA Administrator, Gina McCarthy; the CEOs of ConocoPhillips, GE, Royal Dutch Shell and Siemens; the President of Mexico; the Executive Director of the International Energy Agency; the Secretary General of OPEC; distinguished energy ministers; the Vice Chairman of the U.S. Federal Reserve Board; and leaders of the Federal Energy Regulatory Commission, Energy Information Administration and the Texas Public Utility Commission.. (A complete list of speakers and conference program information are available at www.ceraweek.com)
IHS CERAWeek 2016 will be held February 22-26 at the Hilton Americas Hotel in Houston, Texas. Further information and delegate registration is available at www.ceraweek.com.
About IHS (www.ihs.com)
IHS (NYSE: IHS) is the leading source of insight, analytics and expertise in critical areas that shape today’s business landscape. Businesses and governments in more than 140 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs approximately 8,600 people in 32 countries around the world.
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