Oil and gas operators will need to cut costs by US$170 billion, or 37%, to maintain net debt at 2014 levels at a Brent oil price of $60/barrel, analysts Wood Mackenzie said this morning (23 January).
Wood Mackenzie also says large-scale corporate consolidation is now more likely than at any point since the late-1990s, due to the low oil prices.
"Selling assets into a market with few buyers will be a last resort. Financially strong players will put rationalisation programs on hold, but some companies will find themselves with little choice, unable to achieve the cuts in discretionary spend required to balance the books," it says.
"Large-scale corporate consolidation is more likely than at any point since the late-1990s. History shows that value creation through mergers and acquisition is largely driven by commodity prices: for buyers that believe in long-term oil above $80-90/bbl, 2015 will be a year to go long."
The firm has predicted the oil and gas industry will plunge into full-on capital discipline after dipping its toes in 2014.
Cuts will be spread across: investment in new projects; exploration budgets; operating costs; and shareholder distributions, says Wood Mackenzie.
"In 2013/2014 companies were making strategic choices related to messaging around value versus volume as they tried to increase their appeal to investors; capital discipline in 2015 will be less about choice and more about survival for some players," said the firm. "The effects could last well beyond 2015," it added.
The rising debt levels could also see a rise in distressed sales – asset and corporate, says Wood Mackenzie.
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