A 37% drop in spend across the sector will be needed relative to 2014 to maintain current debt levels if Brent remains at US$60 per barrel in 2015 according to Wood Mackenzie’s latest outlook. This is in addition to the US$9 billion cuts announced by companies in the last few weeks.“Operators in an intensive development phase have the least optionality to respond,” explains Fraser McKay, Principal Analyst for Wood Mackenzie’s Corporate Analysis. “Most other International Oil Companies (IOCs) have flexibility to rein in spend to keep finances on an even keel. But shareholder dividends and distributions are likely to be a significant part of the spend cuts for some companies.”

Collapsing oil prices are also throttling the M&A market as deals underway are being shelved, would-be buyers are melting away. Hopeful sellers will not get the offers they would have expected just a few months ago. According to Wood Mackenzie, M&A will not recover until a new ‘consensus’ emerges – typically at least three to six months from the point that prices stabilise (itself, some way off).  Meanwhile, uncertainty and corporate distress create opportunities for companies with the appetite and capacity to take advantage.  Luke Parker, Principal Analyst for Wood Mackenzie’s M&A Analysis notes, “Weak oil prices through 2015 will ratchet up the pressure on the most financially stretched in the sector. Expect to see falling deal valuations and the emergence of a true buyers’ market.”

Below are the key points of Wood Mackenzie’s outlook.

At US$60/per barrel only 3 out of the top 40 IOCs generate sufficient free cash flow to cover spend including distributions

    Some independents have already cut 2015 discretionary spend; indicating US$70-75/per barrel assumptions
    Spend would need to be cut by US$170 billion or 37% year-on-year at US$60/per barrel to keep net debt flat

Shareholder distributions are under pressure at current oil prices

    Buy-backs: Majors’ programmes at risk due to lack of free cash flow
    Dividends: some Independents likely to follow Canadian Oil Sands and cut; others will seek to sustain in the near-term
    Market ratings: share prices imply US$75/per barrel Brent long-term after steep falls

Strategic themes: impact on investment, exploration and M&A

    Pre-FID projects: US$127 billion of global industry greenfield investment in 2015 at risk of deferral
    Exploration: mature, lower-risk plays will draw spend from high-cost, high-risk frontier

M&A:

    Market liquidity likely to fall; distressed sellers and other opportunities will emerge for cash-rich buyers
    Large-scale corporate consolidation may be closer than it has been at any point since the late 1990s
    History shows that value creation through M&A is largely driven by commodity prices: for buyers that believe in long-term oil above US$80-90/per barrel, 2015 could be a year to go
Source: Wood Mackenzie