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#OM2015
Invest or Divest: The New Financial Imperatives
Julian Mylchreest, Bank of America Merrill Lynch
Ian Catterall, Bank of Tokyo-Mitsubishi
Mike Powell, Barclays
David Staples, Moody’s Investors Service
Jan R. Prins, Chairman:
#OM2015
Observations:
• Global Oil: increased funding gap between cash flow and capex,
• to be addressed by cutting capex, or asset sales?
• or alternatively by curtailment of dividend payments ?
Financial and Operating Trends: Global Oil & Gas *)
Funding Gap
400
420
440
460
480
500
520
540
560
2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2
Annualized Capital Expenditure Annualized Cash from Operation
Source: U.S. Energy Information Agency, Sept. 2015 Jeff Barron. *) Study based on results 99 global oil and gas companies.
#OM2015
Observations:
• In 2015 the global oil and gas industry is cutting/deferring investments by $ 180 bln,
• ca.140 mega-projects (20 bln boe),
• to include: ‒ Canada high cost oil sands; ‒ large capital cost (F)LNG
(Australia, Canada); ‒ deepwater offshore West Africa,
Norway.
0
20
40
60
80
North America
Asia Australia Europe Africa South America
Majors Oil Sands NOCs Independent E&P
Source: Rystad Energy
Capital Expenditure of Global Projects Deferred by mid 2015
Capex $ billion
#OM2015
Observations:
• US E&P firms to balance capital expenditures and cash flows,
• but new investments dependent on available debt finance (bank loans & bonds).
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2001 2003 2005 2007 2009 2011 2013 2015E
Operating Cash Flow Total Capex (including acquistion and facilities)
Source: Raymond James
Financial and Operating Trends: US E&P firms
Funding Gap
$ million
#OM2015
Observations:
• Capital (debt & equity) raising by US E&P firms has slowed down
• H1 2015 fund raising a ‘dead cat bounce’?
• Availability bank debt affected by ‒ growing number of
(“selective”) defaults; ‒ more scrupulous regulatory
environment?
• Periodic “borrowing base” reassessments by banks on the basis of future production and projected oil prices.
0
5
10
15
20
25
30
35
40
2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3
Loans Bonds Equity
$ billion Capital Raising by US E&P Companies
Loans
Bonds
Equity
Source: Dealogic.
#OM2015
Observations:
• Financial leverage (debt as a multiple of annual cash flow) is high and rising from 2 x to over 5 x,
• while debt service as percentage of cash flow increased from 55% (Q3 2013) to over 80% (Q2 2015),
• as interest rates and costs of bond finance may rise.
0
1
2
3
4
5
6
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Debt Leverage
Sources: Bloomberg; The Economist
Debt $ billion
Leverage *)
*) Leverage: Debt to annualized cash flow before capex.
Leverage of 62 top US E&P firms
#OM2015
Observations:
• Borrowing costs for US E&P firms in US High Yield Bond markets increased;
• Shift from “light covenant” structures towards more restrictive, second lien secured bonds.
Energy Industrials Bloomberg HY CB Index Consumer Discretionary
Source: EIA / Bloomberg
0
2
4
6
8
10
12
14
2014 Jul 2014 Oct 2015 Jan 2015 Apr 2015 Jul
Bloomberg High Yield Corp Bond Index (July 2014 – Sept 2015) Option Adjusted Spreads
%
#OM2015
Observations:
• Many oil producers are worse positioned now than during the 2008-09 price downturn.
• Prolonged weakness will ultimately require both spending cuts and increases in non-oil revenues in most states.
• Most exporters sought short-term tactical responses to lower oil prices this year. Next year, economic pain will force more substantial changes.
-20 -10 0 10
Venezuela
Oman
Algeria
Saudi Arabia
Iraq
Mozambique
Guyana
Kuwait
Iran
Kazakhstan
Russia
Malaysia
Mexico
Nigeria
Angola
Ukraine
Ghana
Brazil
Qatar
Ecuador Government Primary Balance, % of GDP
% Source: EIG Energy Intelligence, Country Risk Evaluations Based on 2016 Forecast IMF World Economic Outlook
Country Risk Oil Producers
Gross Debt,
% of GDP
Gvt. Primary Balance, % of GDP
Current Account Balance, % of GDP
15,4 -10,3 -13,2 Algeria
44,3 -0,5 -4,2 Angola
66,2 2,0 -3,4 Brazil
36,6 3,6 -3,0 Ecuador
67,5 1,7 -6,2 Ghana
71,1 -2,9 -21,9 Guyana
11,9 -2,3 1,2 Iran
56,2 -5,1 -3,6 Iraq
19,1 -2,3 -3,1 Kazakhstan
8,8 -2,9 19,3 Kuwait
54,8 -0,7 1,4 Malaysia
51,7 -0,6 -2,2 Mexico
61,9 -4,5 -45,6 Mozambique
11,2 -0,6 1,3 Nigeria
9,6 -13,1 -13,0 Oman
26,1 2,7 5,0 Qatar
17,1 -2,0 6,3 Russia
1,7 -8,8 3,7 Saudi Arabia
92,6 0,4 7,2 Ukraine
30,6 -18,0 -0,8 Venezuela
#OM2015
Invest or Divest: The New Financial Imperatives
Julian Mylchreest, Bank of America Merrill Lynch
#OM2015
Invest or Divest: The New Financial Imperatives
Ian Catterall, Bank of Tokyo-Mitsubishi
#OM2015
Invest or Divest: The New Financial Imperatives
Mike Powell, Barclays
#OM2015
Invest or Divest: The New Financial Imperatives
David Staples, Moody’s Investors Service