The production costs of EMEA high-yield oil producers have fallen over the last year, but still vary significantly among firms, making them an important credit differentiator in the sector, Fitch Ratings says. Further shocks cannot be ruled out despite the improving situation in the sector, and lower-cost producers are better positioned to survive.
Our preliminary assessment of 10 (mostly unrated) companies found that most had cut their unit production costs year on year, helped by improved spending discipline, efficiency gains and currency depreciation in some oil-producing countries. But the highest-cost producers face unit costs nearly three times higher than those at the other end of the scale.
Aker BP and Lundin, both operating offshore of Norway, have the lowest Fitch-adjusted costs in the group at USD9/bbl and USD10/bbl, respectively, meaning their operating profits are less sensitive to oil price fluctuations. Low costs, along with relatively strong production and liquidity, particularly for Aker BP, indicate these two companies are better positioned to cope with a downturn in the market than most of their peers.
EnQuest is at the other end of the spectrum: its Fitch-adjusted 2016 unit production costs fell by 17% yoy on cost-cutting efforts and a weaker pound, but at USD25/bbl remained much higher than its peers’. This reflects its focus on mature and marginal fields off the UK. High costs and leverage were among the reasons why EnQuest suffered more than peers from low oil prices and had to restructure its debt in late 2016.
Hedging helps offset higher costs, but only partially as the forward oil price curve remains flat and the price at which oil companies can hedge their production has decreased. For example, in early 2016 EnQuest said it hedged a part of its annual production at USD68/bbl, while in early 2017 the hedging price fell to USD51/bbl. This means that the average realised price of some producers with a significant amount of hedged volumes may fall in 2017 despite a moderate recovery in average spot oil prices. But hedging remains an important credit factor as it should still provide significant support if there were another sharp decline in oil prices.
Source: Fitch Ratings