Following a brutal year for their balance sheets, the world’s biggest oil companies are anticipating a windfall of cash flow this year. Prices have rallied significantly over the past month or so, and the massive cost-cutting from last year positions some of the biggest International Oil Companies (IOCs) to reap the benefits of high crude prices.
According to Wood Mackenzie, the corporate cash flow breakevens have been reduced from a pre-pandemic average of $54/bbl, all the way down to $38/bbl, with some companies having a breakeven as low as $30/bbl. If oil prices average around $55/bbl these companies can set record cash flows. At the time of this writing WTI crude oil is trading at $60.39/bbl. The aggressive cuts coupled with resurgent prices may very well lead to a true V-shaped recovery. The world’s largest IOCs achieved these cuts through not only lowering administrative and overhead expenses, but also by divesting from non-core business assets that were not producing at profitable level.
Wood Mackenzie also believes that net debt reduction will be a primary focus of IOCs going forward, leading to a historically cautious approach to an upcycle, something that is a departure from historic norms. IOCs will continue forward by planning for the worst and will continue to sell non-core assets. All of these projections look very positive for IOCs, but as always the results will be determined by how disciplined the companies stay when working to correct their balance sheets. The other somewhat unknown factor right now is determining how these companies decide to use their rebounding cash flows to decarbonize and prepare their portfolios for the future energy transition. There are plenty of uncertainties ahead, but 2021 is certainly off to a good start relative to the challenging year of