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Debt levels of oil & gas companies had been rising
significantly and peaked in 2017. Since then, debt and leverage
ratios have started to drop and are expected continue to do so
driven by improved cash flows and capital discipline programs
across all groups of companies.
Organic capex in 2019 has increased compared with 2018 and it is
expected to modestly continue in 2020-2021. Nevertheless, current
organic capex remains at a fraction of the levels recorded in
2013/2014 and, as oil price looms, have been languishing in recent
months, budgets are expected to be revised slightly downwards.
Moreover, the upstream sector has performed poorly in the stock
markets not only since the oil price downturn in 2014, but also
over the last decade. In addition, the share of the energy industry
in stock market indexes such as the S&P 500 has recorded a
staggering drop from roughly 25% four decades ago to below 5%
currently.
More recently, this underperformance has started to have a
momentous impact on investors who, as a result, are pressuring oil
& gas companies to deploy excess free cash flow to reward
investors (via share buybacks and higher dividend yields), slash
debt, and to reduce investments in expensive, complex, long-cycle
projects of the sort that experienced massive cost overruns and
delays in the past decade.
Recent IHS Markit research shows that the Exploration &
Production (E&P) sector is experiencing a 'crisis of
perception' as investors that were driven by growth and value shift
their portfolios from E&P to better performing index funds
and/or "greener energies" sectors.
Learn more details in our forced change study.
Obviously, reluctance to invest in E&P - based on the
performance of the sector and/or Environmental, Social and
Governance (ESG) aspects - raises worries around capital
availability for the sector, heighten by recent announcements from
some financial institutions and pension funds to be more
restrictive in lending to or investing in certain or all fossil
fuels. Furthermore, until oil & gas companies can achieve more
attractive returns in line with historical mid-teen averages from
traditional business sectors, they are unlikely to remain out of
favor with investors.
In response, oil & gas companies are shifting their
portfolios to shorter-cycle projects with faster payback periods,
and in many cases prioritizing gas as the fossil fuel with the
least carbon footprint, and allocating an increasing amount of
capital to sectors seen as supporting the energy transition. IHS
Markit research shows that investments in low-carbon sectors by the
seven integrated oil & gas companies made since 2010 have
reached over $8 billion. Nevertheless, until the oil & gas
companies can achieve attractive returns from these new sectors, it
is expected that they will not scale up investments significantly
and their efforts will continue to be perceived by certain
stakeholders as greenwashing.
Watch the recent presentation:
Laura Sima is an associate director for companies &
transactions at IHS Markit.
