Independents with low cash-flow breakevens and low leverage (Marathon, Hess, Pioneer) are best positioned to grow in 2017
Cash-flow neutrality, capital discipline and de-leveraging will remain the strategic priorities for the coming year. Unless oil prices rebound to US$60/bbl, a return to double-digit production growth is still some way off for most, according to an analysis by Wood Mackenzie.
So what does the future hold for US Independents?
Growth and cash-flow neutrality are mutually exclusive goals for all but a handful at US$50/bbl WTI, but most companies could self-fund 10 per cent growth at US$60/bbl.
A return to material self-funded growth requires >US$55/bbl
Wood Mackenzie estimates that their peer group of the 17 largest US independents requires an average of US$50/bbl WTI in 2017 to be cash-flow neutral and replace production declines; US$57/bbl and US$63/bbl is required to grow at 5 per cent and 10 per cent, respectively.
Three companies can achieve self-funded double-digit growth in 2017 at <US$50/bbl.
Production could decline even with increased spending
Wood Mackenzie estimates that half of the companies’ production would decline if capex remained flat from 2016 to 2017; several require >40 per cent increases just to offset declines. Southwestern and Chesapeake face the biggest challenge.
Companies with inventories of high-impact wells (Pioneer and Range) and those with production support from international assets (Marathon, ConocoPhillips, Hess) require less capital to generate growth.
Delivering 10 per cent growth across the peer group in 2017 would require US$19 billion more capex than 2016 and translate to a US$11 billion cash-flow deficit in Wood Mackenzie’s base-price scenario.
Who is best positioned to grow in 2017?
Companies with low cash-flow breakevens and low leverage (Marathon, Hess, Pioneer) are best positioned to grow in 2017.
Several companies have already provided preliminary 2017 guidance, much of which aligns with Wood Mackenzie’s analysis.
But they expect activity plans to remain dynamic, with activity ultimately determined by oil and gas prices, capital availability, M&A activity, hedging activity, shifting cost structures, and development optimisation.