Why big oil expects record cash flow in 2021


The world’s largest oil companies are set for a cash flow bonanza this year, probably at record levels, as massive cost cuts in the wake of the 2020 oil price and oil demand collapse have significantly lowered the corporate cash flow breakeven for many firms.

After posting record losses in 2020, a year which company executives described as one with “the most challenging market conditions,” Big Oil is looking at 2021 with increased optimism, mostly because oil prices have rallied in recent weeks. Moreover, the ultra-conservative capital spending plans and the huge cost cuts have allowed international oil companies (IOCs) to materially lower their cash flow breakevens.

These factors are set to result in a record cash flow for the biggest oil firms this year if oil prices average $55 per barrel, Wood Mackenzie said in new research.

Currently, investment banks largely believe that a tightening oil market, easy monetary policies from governments to boost economies, and oil as a hedge against inflation for investors would lead to oil prices averaging around $60 a barrel this year, with possible spikes to $70 and even $75 before or during the summer.

Expectations of around $60 oil, as well as Big Oil’s decisive actions to slash costs last year, will be boosting cash flows because the average corporate cash flow breakevens have now reduced to $38 per barrel from $54 before the COVID crisis, Tom Ellacott, Senior Vice President, Corporate Research, at WoodMac, wrote this week.

Seven out of 40 IOCs reviewed by Wood Mackenzie would generate cash flow even if oil prices averaged below $30 per barrel this year.

Therefore, the biggest oil companies in the world could see a V-shaped recovery in their cash flows, according to the energy consultancy.

“The scale of the financial reset has primed the sector for a recovery in free cash flow. At an average price of US$55/bbl, we estimate free cash flow generation could top US$140 billion in 2021 – exceeding any previous year since 2006. If oil prices reach US$70/bbl, free cash flow would be double the previous peak,” Ellacott says.

The scale of the financial reset was dramatic amidst the pandemic-hit oil prices and oil demand last year. The biggest oil firms cut thousands of jobs each, with BP slashing 10,000 jobs or 15 percent of workforce, Shell cutting up to 9,000 jobs, Exxon cutting 14,000 jobs, including 1,900 in the United States, to name just a few.

Apart from the administrative and overhead expenses, Big Oil also slashed capital expenditure (capex) plans and continues to vow spending discipline. Many of the companies have accelerated the high-grading of their portfolios, selling non-core businesses and assets, such as BP divesting its global petrochemicals business to Ineos for $5 billion, or, most recently, ExxonMobil selling most of its non-operated assets in the UK’s central and northern North Sea to private equity fund HitecVision for more than $1 billion.

Sales of non-core assets are likely to accelerate as companies would look to focus operations on the regions they have identified as key to their cash flow and return on investment generation.

Such sales could also accelerate debt reduction, which has ballooned over the past year, according to Wood Mackenzie.

Debt reduction will actually be the key theme for Big Oil this year and going forward, WoodMac says, noting that the priorities in capital allocation “will be very different to any previous up-cycle.”

“Companies will continue to plan for the worst, prioritising net debt reduction in redeploying surplus cash flow,” Ellacott said.

Unlike in any previous up-cycle, Big Oil now also faces an existential theme—how to attract investors back to the industry.

Disciplined spending and strengthening of balance sheets will surely help, but this may not be enough. The biggest oil firms face a backlash from ESG-conscious investors, while they are still struggling to convince long-term oil investors that the recent net-zero strategies could, one day, generate as much cash flow and profits as the oil business.

Record cash flows, if they materialize, could help—companies could use surplus cash to deleverage and allocate more capital to their renewables and other lower-carbon energy businesses.

Leave a Reply