Edison Investment Research

E&P industry funding cost still high

E&P industry funding cost still high

Cairn’s recent deal with Flowstream gives us another data point to examine cost of capital in the industry. What is the implied cost of capital for Cairn from this deal?

Premier Oil continues to consolidate

This morning, Premier announced the signature of a share purchase agreement with Al-Haj Energy Limited for the sale of Premier Oil Pakistan Holdings (Premier’s Pakistan business) for a cash consideration of $65.6m. Proceeds from the sale are, understandably, to be used to reduce corporate debt.  The sale of Pakistan follows the divestment of Block A Aceh ($40m) in January 2015 and Premier Norge AS ($120m) in November 2015 as Premier consolidates its geographical foot-print and focusses on core areas including the UKCS and SE Asia.

Wells to watch in 2017

Since the oil price crash of 2014, exploration has been particularly badly hit as companies looked to trim expenditure. Wood Mackenzie estimates that 2017 exploration will account for 8% of upstream expenditure, down from historic norms of 14%. In this more difficult environment, any surviving exploration has tended to be led by majors, for example ExxonMobil’s giant Liza discovery offshore Guyana in 2015. In our most recent Exploration Watch, we highlight wells due to spud in 2017 that involve independent companies, with resources estimates greater than 100mmboe. Our exception is the much anticipated multi-billion barrel potential Korpfjell prospect in the Barents Sea offshore Norway, which is operated by Statoil and partnered by major companies.

Misunderestimations - how accurate are production forecasts from industry and analysts?

Looking at the accuracy of production forecasts for major oil companies (by the companies and by covering equity analysts)

We examine how accurate industry participants are in forecasting production in advance, and see how these seem to be consistently over optimistic

What a difference a year makes

BP upgrades FCF guidance

BP’s 2017 strategy presentation served to highlight what difference one year can make in the world of integrated oil and gas. Upstream FCF guidance provided in Baku (2016) of $7-8bn in 2020 has been increased to $13-14bn in 2021. Combined group, upstream plus downstream, FCF guidance for 2021 now totals $22-24bn pre-tax. This is a material step up in post capex cash generation with the excess available to address scrip dilution, distribute to shareholders, reduce gearing, or pursue growth - assuming guidance is achievable of course. An upstream FCF bridge is provided below showing that a significant proportion of the increase comes from a 5$/bbl increase in oil price planning assumption from 50$/bbl real to 55$/bbl real as well as recent acquisitions, most importantly the ADCO onshore concession. 

Filicudi discovery - positive start to 2017 Barents exploration

Lundin’s Filicudi discovery is a successful start to exploration drilling in 2017 for the Barents Sea. The prospect holds an estimated 35 - 100mmboe and encountered 63m of oil and 66m of gas in high quality Jurassic and Triassic sandstones. Filicudi is on trend with Johan Castberg around 40km to the north east and the discovery has derisked the adjacent 218mmboe Hurri prospect together with the 285mmboe Hufsa. As a result, both prospects now carry a 25% CoS, and Lundin and licence partners AkerBP and Dea are considering drilling one or both of these later this year.