Mar 23, 2020
Amid the 21% drop in Brent-type oil prices, in the past week, oil companies are beginning to move to face the crisis scenario triggered by the covid-19 pandemic and the market dispute between Saudi Arabia and Russia. In Brazil, PetroRio announced that it will postpone investments, while Petrobras resorted to a disbursement of US $ 8 billion in committed credit lines and evaluates extra measures to reinforce its cash flow, such as further reduction of costs and optimizations of its working capital. . In the international market, industry giants such as ExxonMobil, Total, Equinor and BP signal for spending cuts.
The movement takes place amid bleak prospects for the oil and gas industry, according to the consulting firm Wood Mackenzie. The consultancy’s expectation is that investment cuts will be “immediate and deep” and that global sector spending could fall by more than 25% in 2020. On Friday, Brent for May closed at US $ 26.98.
In the Americas, Brazil is one of the countries best prepared to face the crisis. According to Wood Mackenzie’s head of oil exploration and production in Latin America, Marcelo de Assis, 74% of Brazilian production operates at a breakeven price of US $ 35 a barrel or less. “Brazil is in a better situation, because of the lower costs of the pre-salt. The situation is worse in Canada, in the shale of the United States, Venezuela and Mexico”, says Assis.
Regardless, the outlook is bleak from the point of view of cash generation. According to the consultancy, the sector faces “unprecedented” uncertainties. Wood Mackenzie cites that, to improve the chances of survival, companies will have to increase the efficiency of operations; postpone the decision to invest in new projects; and reduce the levels of exploration activity. New large projects will be put on hold and short-cycle discretionary investment will be kept to a minimum.
Equinor, for example, will postpone the Bay du Nord project in Canada, while ExxonMobil evaluates measures to “significantly” cut capital and operating expenses and France’s Total will freeze new recruits, increase cost savings and halt its program share buyback due to falling oil prices, according to Reuters. BP may cut its investment plan for the year by 20%, Bloomberg reported.
“Even if OPEC + returns to the table [negotiating] and reaches a new agreement, recent events have irreversibly changed the perception of risk. The genius will not be put back in the bottle,” highlights the WoodMack report.
In the short term, the consultancy believes that companies – private and state – are likely to continue producing at a loss, in the hope that the price will recover quickly. “But if prices do not recover, the taps will inevitably be closed. The disconnections [of wells] will be more substantial than in 2015/2016,” says Wood Mackenzie.
For the rating agency Moody’s, the persistence of low prices over a long period represents an additional risk for oil companies, but the expectation is that many of them will not have their ratings downgraded in the short term. The agency expects the new coronavirus pandemic to continue to affect corporate performance in the second quarter, but that economic fundamentals will start to improve in the second half. Moodys estimates that the average price of oil is expected to be between $ 40 and $ 45 in 2020, rising to between $ 50 to $ 55 in 2021.
According to the agency, the large integrated companies in the sector have shown strength in the last oil casualties, with capital discipline and presence in refining – which helps to reduce the impacts on exploration and production. State-owned companies, in turn, should not be downgraded, as they have notes linked to the sovereign rating of their countries. For companies that operate only with exploration and production, the expectation is to review the perspectives of the notes, but with few of them being downgraded.