What does 2018 hold for Australia’s oil and gas sector?

Since the middle of 2017 there has been a steady recovery in global oil prices. In January of this year, Brent crude crossed the US$70 per barrel (bbl) mark – the first time in more than three years – and is hovering around US$60/bbl.

What does all this mean for Australia’s oil and gas sector in 2018, especially in what could be a pivotal year for our liquefied natural gas (LNG) industry as we are poised to assume the title of world’s largest LNG producer?

One thing’s clear, there is significant opportunity now the oil and gas sector has reset itself to operate at lower commodity prices.

As market conditions improve, the focus will be on sustainability at sub-US$60/bbl oil prices. After several years of massive investments, project delays, disappointing returns and negative news, it’s time to prudently reap the benefits of the transition to operations and the export dividend. Demonstrating that free cash flow can grow in a low-price environment and fund growth and higher shareholder returns will be the big focus of many companies in the year ahead.

There is considerable opportunity for those companies sufficiently agile and forward looking to achieve sustainable competitive advantage. Leading edge companies are looking to transform into digital organisations, leveraging the huge volumes of operational data and turning it into actionable, strategic insight. Asset portfolios are being reshaped as the world unambiguously transitions towards lower carbon energy sources.

With that in mind, 2018 will be a year of growth as the sector turns the corner.

The oil and gas sector globally is in recovery mode with corporate earnings, cash-flows, valuations and credit ratings starting to respond to the cyclical recovery in the commodity markets. This is feeding into improved investor sentiment for the sector.

The capital austerity and downsizing that characterised the last three years has given way to a more optimistic, growth-orientated outlook with investment, exploration and production all starting to pick up. Here in Australia, we have endured the chilling winds of the downturn to emerge as a stronger, leaner and more efficient industry with a number of attractive near-term growth options that could be earnings catalysts.

Portfolios have been rationalised, debt burdens reduced and operating models made considerably leaner. With the shift from investment to operations phase, the focus on operational excellence and productivity is now intrinsic to the fabric of being an oil and gas producer. In the future, asset portfolios will be more flexible, capable of earning decent returns with oil price scenarios in the US$40 to US$60/bbl range.

2018 will also emerge as the year of ‘new energy’.

The world is unambiguously shifting towards low carbon energy. One of the big emerging trends in oil and gas is a focus on ‘new energy’. In a clear indicator of where the wind is blowing, oil and gas companies globally and here in Australia are making significant investments in renewable energy like wind farms, solar PV and battery storage. Companies and policy makers are now considering the impact of electric vehicles on business and society. This repositioning towards low carbon energy is redefining the nature of the oil and gas business, impacting the traditional operating model and helping to shift investor perception of the sector. Expect much more of this in 2018.

M&A will ramp up too.

Mergers and acquisitions (M&A) are likely to be a big trend in 2018, consistent with a more ambitious growth agenda, healthier cash-flows and the need to rebuild portfolios. While large-scale deals are unlikely in the current environment, portfolio style deals involving discrete asset purchases or alliances to form a strategic beachhead in a new market or geography could define the 2018 M&A landscape.

And what about LNG?

In 2017, gas demand surprised on the upside and LNG prices have doubled since July, supported by the oil price recovery. As a result, the business case for new supply development is strengthening. With LNG economics and investor sentiment improving, the market is likely to assign more value to low capital intensity resource projects such as brownfield and backfill developments.

This suggests another window of opportunity for new Australian supply, although the challenge will be in bridging the cost divide. The LNG projects of the future will be quite different than the mega-projects that characterised the first wave.

It’s going to be a busy year!


Content first published by APPEA on 24 January 2018

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