Upstream companies are positioned to thrive in 2019, according to Wood Mackenzie (WoodMac), which said in a release published Monday that the sector enters the new year “prepared to capitalize and build”.
“Oil and gas companies can cope with whatever’s thrown at them in 2019. Portfolios are set to weather low prices,” Tom Ellacott, WoodMac senior vice president, said in the release.
Ellacott outlined that the commitment to capital discipline “will not budge” entering the new year but said the temptation to “relax the purse strings” will grow if prices bounce back.
“If oil prices return to $70 per barrel or above, the cash windfall generated is huge and will inevitably drive sentiment back in favor of growth. It will also increase pressure to return surplus cash to shareholders,” Ellacott stated.
WoodMac said in the release that companies will be cautious about raising shareholder distributions and investment too quickly. Many will favor deleveraging to absorb any future shocks, and keep their powder dry for opportunistic M&A, according to WoodMac.
Back in October, WoodMac announced that upstream players needed to boost spending to meet future demand. The company forecasted at the time that global oil and gas development spend needed to increase by around 20 percent.
“Companies will need to start investing again to sustain their business. But decision-making will be fraught with uncertainties, the oil price and energy transition not least among them,” Malcolm Dickson, WoodMac director of upstream oil and gas, said in a company statement published on October 24.
In the statement, WoodMac said its research showed the recovery is much slower and shallower than in previous cycles. Development spend will increase five percent this year, after a two percent rise on 2017, according to WoodMac.
“Investment rises from a low of $460 billion in 2016 to just over $500 billion in the early 2020s, far below the $750 billion peak in 2014,” WoodMac stated on October 24.
Fitch Solutions Macro Research is forecasting Brent to average $75 per barrel next year. Jefferies is forecasting a $65.75 per barrel price for Brent in 2019.
WoodMac is an energy research and consultancy company. The business, which has offices all over the world, traces its roots back to 1923.