OIL & GAS MARKETS • DEPARTMENTS
2022 discoveries drive
value creation of exploration
projects to record levels
Cashflow analysis of 25 North
Nor th American independent E&Ps
E&P s . F. Forecasted
orecasted cashflow assuming current trends in production,
produc tion, operating expenditur
exp enditur
enditure,e,e, capita
capitall expenditure,e,e, dept repayments,
expenditur repayments , share purchases,
purchases , dividends,
dividends , and other cash expenses f for or 25 companies analyzed.
Operating cash fl ows in the upstream market are expected to remain high in the
foreseeable future, even if oil prices drop to $65-70/bbl, according to McKinsey.
High cash flows among North American E&Ps likely to
drive new consolidation wave, McKinsey report shows
McKinsey and Company says it
expects a fresh wave of M&A in the
North American upstream market in the
coming years, fueled by high operat-
ing free cash flows. In a new report,
the firm analyzes historical cash flows
and projected operational and financial
performance for the leading 25 North
American E&P companies. Operating
cash flows are projected to remain high,
with levels between $70-$90 billion in
2023 and between $50-$70 billion to 2027
– even if oil prices drop to $65 to $70/bbl.
The E&Ps analyzed are expected to
generate a total of $140-$200 billion in
operating cash flow in 2023. Operators
are taking advantage of these high cash
flows by pulling all the traditional levers
of capital management. For example,
industry debt load decreased by $25 bil-
lion from 2021 to 2022 and is forecast
to fall by a n additional $15-$20 billion
by 2027. With debt burden reduced,
returning shareholder value will be pri-
ority, and McKinsey expects dividends
to climb to between $30-$40 billion over
the next year. But with a high volume of
cash, these traditional levers will hit a
natural cap. McKinsey’s analysis shows
that only inorganic growth is unbounded
going forward, suggesting that cash will
be deployed through M&A.
Tom Grace, Partner at McKinsey &
Company, said, “Even after these uses of
cash have been exhausted, the industry
is likely to remain cash-flow positive in
2023 and beyond, with a ‘war chest’ of
$100-$230 billion. The primary tool left
in the corporate finance toolkit is deploy-
ment of cash through M&A. A common
refrain from industry veterans discuss-
ing M&A is, ‘You are either at the table,
or you’re on it.’ This is a harsh reality, but
companies with strong M&A capabilities
and bold strategies often exit the cycle
fully fed and healthy.”
Industry trends suggest that multiple
M&A strategies are driving this next
wave of consolidation. Basin consolida-
tors will likely look to add scale and lever-
age operational advantages to achieve
outsized returns. Integrators may seek
to add assets in adjacent portions of
the value chain to expand margins and
increase resilience. The bold will prob-
ably use a portion of their cash to seed
businesses to reshape their portfolios
and position for the energy transition.
“The oil and gas industry is entering
a period of unprecedented uncertainty
characterized by the energy transition,
evolving investor sentiment, and mount-
ing energy security concerns,” said
Jeremy Brown, McKinsey Consultant .
“Now is not the time to bask in the glow
of recent success. As in the past, success-
ful industry players will work tirelessly
to define and deliver a strategy rooted
in sound M&A investments to accelerate
their future growth and performance.”
The global oil and gas exploration sector
had its strongest year in 2022 in more than
a decade. In its work to improve portfolios
by adding lower-carbon, lower-cost advan-
taged hydrocarbons, the sector created
at least $33 billion of value and achieved
full-cycle returns of 22% at $60/bbl Brent
prices, according to a recent report from
Wood Mackenzie .
It states that exploration well numbers
were less than half the numbers during
pre-pandemic years, yet the total volume
of 20 billion bbl of oil equivalent matched
the average annual volumes of 2013-2019.
“Explorers were able to drive very high
value through strategic selection and
focusing on the best and largest pros-
pects,” said Julie Wilson, Director of Global
Exploration Research at Wood Mackenzie.
The highest value came from a new
deepwater play in Namibia, as well as
resource additions in Algeria and other
deepwater discoveries in Guyana and
Brazil . “The average discovery last year
was over 150 million barrels of oil equiva-
lent, more than double the average of the
previous decade,” she said.
National oil companies and majors con-
tinued to lead in exploration , accounting
for almost three quarters of new resources
discovered . These include companies like
TotalEnergies, QatarEnergy and Petrobras.
Newly discovered resources in 2022
created at least $33 billion in value even
though the number of exploration wells
were less than half of pre-COVID years.
D R I L L I N G C O N T R AC T O R • M A R C H/A P R I L 2023
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