WoodMac: Upstream industry focused on financial health over growth

Upstream companies are optimistic about oil prices in 2018, but financial health remains more of a priority than growth, according to Wood Mackenzie’s recently released second annual State of the Upstream Industry survey.

The survey found that the industry believes oil prices will average above $60/bbl this year, rising further through to 2021. More than 75% think prices will rise above $75/bbl in 2021.

However, in the performance metrics consisting of free cash flow, cash margin, rate of return, cashflow breakeven, net present value and production, nearly half of the respondents see free cash flow is the most important metric. Only 4% of respondents see production as the key metric.

Lower-risk growth is still preferred, and frontier exploration is slowly fighting back. In a period of higher oil prices, it looks like growth options are being brought back to the table. Asset mergers and acquisitions and frontier exploration are more attractive options this year than last year, the survey showed.

Deepwater and exploration still require the highest hurdle rates, but the weighted average is beginning to decrease, according to the survey.

Capital expenditure forecasts are expected to increase this year, with 85% expecting higher investment levels compared with 70% in 2017.

Martin Kelly, WoodMac’s head of corporate analysis, said, “The industry’s growing confidence is evident in spending expectations too. More will be spent globally and in each region this year compared to last year. Capital investment, exploration investment and M&A spending will all increase by at least 10% year-on-year.”

Kelly added, “With more of a focus on growth and investment than this time last year, companies are still disciplined in how they sanction projects using hurdle rates. But hurdle rates have dropped slightly this year, particularly at the riskier end of the investment spectrum. Both deepwater and exploration investments have a lower average hurdle rate compared to last year, moving from close to 16% last year to below 15% in the 2018 survey. This may be statistically insignificant, but it’s a trend worth keeping an eye on.”