The energy sector, an underperformer in the S&P 500 since oil prices peaked in 2014, is facing a reckoning to entice investors after ending 2018 “solidly” in last place, according to Deloitte.
“Some impatient investors have fled the upstream oil and gas sector while companies, individually and collectively, work through the transition from growth at any cost to prudent capital spending,” analysts said.
Deloitte’s team said a blueprint could bolster operations and portfolios for national oil companies (NOC), independents and majors. Deloitte’s analysis said the strategic avenues would vary by the size of the company.
“A major might produce several million boe/d from shale, conventional onshore, offshore and deepwater fields, as well as from the oilsands, while also operating midstream, downstream, and trading assets that diversify its overall portfolio,” analysts noted.
“A small, international independent would likely be the opposite, with a handful of high-impact upstream exploration investments in a single resource theme (with commensurately high risk) and limited exposure in midstream or downstream operations.”
The U.S.-based independents “should think beyond drilling,” analysts said. “Investing in longer-lived assets, such as gathering, pipelines and storage infrastructure, can provide cash flow even in a lower commodity price environment.”
Meanwhile, the majors should consider divest legacy assets “that have gone well past their economic value” within their upstream, midstream and downstream portfolios. Resource-rich NOCs might pursue petrochemicals, plastics or exports, while the NOCs with fewer resources “should rethink synergies between domestic needs and overseas spend.”
Acquiring international natural gas/liquefied natural gas assets would help an NOC expand globally as well as meet domestic needs -- a “win on both fronts.”
For the international independents, pioneering the “next frontier basin” may require partners and farming down earlier in the commodity cycles, according to Deloitte. This would allow the producers “to hone in on one aspect of the business (e.g. geology or geophysics), while at the same time creating a relationship with a company better positioned to develop and operate the discoveries.”
For the diversified independents, a “Goldilocks approach” could be the appropriate approach to balance scale and scope along with costs.
“The long-term assets could provide cash flow through leaner periods, while maintaining a hopper of exploration leads and short-term projects allows for sustainable growth. With this approach, diversified independents will be better positioned to take advantage of the current upswing in crude prices and weather the next downturn.”