Free cash flow bonanza for the upstream industry in 2021
The year 2021 has started out on a positive note for oil and gas companies – in fact, this might be the best year yet in terms of generating cash for the industry. Oil prices have strengthened considerably over the last 12 months and are currently trading in the $60s. Simultaneously companies are continuing to focus on capital discipline, have made only a modest increase in investments this year, following the 30% drop last year. The oil price growth and investment restraint have resulted in a considerable increase in free cash flows (FCF) for the oil and gas producers.
Last year, cash from operations dropped almost $200 billion or around 35%. This implies that the companies had less cash available to finance new activity and pay out cash to their owners. As a result, investments also dropped last year, falling by almost $110 billion or around 30%. This year, the cash from operations is expected to make a comeback, and in our base case with Brent price at $54 per barrel (bbl), the cash from operations for public companies is expected to reach around $500 billion, an increase of more than 30% compared to last year.
However, the cash going into investments is not expected to recover this year and is likely to continue at the same level as last year. Figure 1 shows historical and forecasted cash from operations* and investments within upstream for all public E&P companies. It shows also the relationship between investments and cash from operations in the investment ratio**. During the last decade, this ratio was fluctuating but averaged around 72%. In 2021, the ratio is expected to fall below 50%, for the first time since 2000.
A falling investment ratio implies that the E&P companies will get more cash at hand. This is illustrated in Figure 2 where we show the total free cash flow (FCF) for all public E&P companies at different oil prices. Last year, the total FCF generated by public E&P companies was $140 billion, down $90 billion, or almost 40% compared to 2019. In our base case of $54 per bbl we expect FCF to recover this year and reach around $260 billion, an increase of $120 billion from last year.
*Cash from operations is calculated as revenue minus operational costs and government take.
**Investment ratio is calculated as investments divided by cash from operations.
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