Oil Industry Profitability Under Pressure

Oil and gas companies are facing financial constraints due to the decline in crude oil prices, leading to a reevaluation of their investment strategies. Major oil companies may require oil prices of around $80 per barrel to maintain current shareholder payouts, potentially resulting in borrowing or cuts in investments and buybacks. The outlook for upstream investments has been revised downward, mainly due to market uncertainty and weaker project economics, especially affecting deepwater projects.

The oil and gas industry is feeling the pressure as crude oil prices dip below $60 per barrel, impacting profitability and cash flows, prompting companies to reconsider their capital allocation. This situation is expected to lead to a decrease in upstream investments, with major companies indicating a focus on prioritizing shareholder returns such as dividends and buybacks over new investments.

While the full impact of market volatility on oil prices is yet to be determined, an analysis of industry resilience under different pricing scenarios suggests that major companies would need oil prices to reach $80 per barrel to sustain current levels of shareholder payouts. With a significant gap between the cash breakeven level and current prices, companies may need to consider options like increased borrowing or potential cuts to investment budgets and share buyback programs if oil prices remain low.

Espen Erlingsen, the Head of Upstream Research, highlights that leading US tight oil producers are in a relatively better position, requiring a West Texas Intermediate crude price of approximately $60 per barrel to support investments and shareholder distributions. This suggests that tight oil companies are less vulnerable than major companies at current price levels.

In response to the industry downturn, the outlook for upstream investments has been revised downward by about 5% in the medium term, primarily due to the expected delays in project sanctions caused by market uncertainty and weaker project economics, particularly affecting deepwater investments where major companies have a significant role.

Espen Erlingsen shared this analysis via Rystad Energy, emphasizing the challenges faced by the oil and gas industry amidst falling crude oil prices.