Crude oil prices dropping back below $50 per barrel again this week is just adding insult to injury in the oil and gas industry, according to Oppenheimer Equity Research. In a July 22nd report, energy sector analysts Fadel Gheit and Luis Amadeo argue that nearly all oil and gas companies are spending more than they are bringing in. That is, their current capex spend and dividend will clearly exceed their annual operating cash flow.
The Oppenheimer analysts note: “We believe the oil industry is much more vulnerable to low oil prices than many had thought only a few months ago. For energy companies and investors life was good at $90 oil, but unpleasant below $60, which could be a prolonged secular downtrend. Inflated oil prices resulted in complacency, uneconomic investments, capital inefficiency and value destruction. Both companies and investors must adapt to the new realities.”
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Oil industry’s cash flow plummeting
The report notes that operating cash flow peaked in 2008 for oil majors and larger E&Ps (Exxon Mobil with $59 billion and ConocoPhillips with $27 billion), but dropped notably in 2009 on much lower energy prices. Gheit and Amadeo anticipate 2015 operating cash flow will shrink by 29% for the majors and 43% for the large E&Ps. Chevron and Chesapeake Energy will lead the way down with 32% and 59% declines in cash flow, respectively, but will bounce back by 10% and 4% in 2016.
Capital spending to drop more
Capital spending must also come down in the near future. Capex topped out in 2013 for energy majors, led by Exxon Mobil with $42.5 billion with Chevron right behind, then Shell at around $40 billion. The Oppenheimer analysts anticipate that 2015 capex will decline year over year by 12% for the majors and 39% for the large E&Ps, but move up by 17% for the five biggest independent refiners.
Major cashflow shortfall
The bad news is a major cash crunch is looming in the energy sector. Even with reduced capex and a flat dividend, it looks like nearly all oil and gas producers will be looking at large cash flow shortfalls over the next couple of years, with Chevron facing an industry record deficit of $18.6 billion in 2015, up from $12.5 billion in 2014 and $11.3 billion in 2013. Of note, energy firms COG and SWN have been running deficit for a decade now, and CHK, EOG, MUR, PXD and RRC for nine years.
Dividends at risk
Gheit and Amadeo conclude by saying that unless oil prices starting moving back up within the next few quarters, many energy firms are going to be forced to freeze or even cut dividends.
They explain their perspective: “Although we expect most companies, especially the majors and the largest E&P companies to defend their dividend, we think a prolonged period of oil prices below $60/b could undermine confidence in the sustainability of the dividend. At this low price all oil companies are funding their dividend through additional borrowing or asset sales and even the majors could be forced to freeze or cut their dividend, which could sink their shares.”