Deloitte: Oil & Gas Industry Could Have Highest-Ever Cash Flows and Become Debt-Free, Primed to Accelerate the Energy Transition

HOUSTON, Aug. 25, 2022 /PRNewswire/ -- 

• A series of disruptions amid ongoing underinvestment has triggered a readjustment in the energy market.
• Oil and gas producers could report highest-ever free cash flows, as much as $1.4 trillion, in 2022.
• The U.S. shale industry can potentially become debt-free by early 2024 if prices stay strong and discipline prevails. This would overcome the decade-long loss of $300 billion.
• Global upstream is set to generate up to $1.5 trillion in surplus cash by 2030¹, possibly with 70% of this surplus generated by 2024; this could be enough to fund and balance both low-carbon and core oil and gas priorities this decade.

Over the past ten years, the U.S. oil and gas industry has dealt with unprecedented cyclical changes. Despite economic uncertainty, geopolitical instability and ongoing supply chain disruptions, the industry is financially strong and well positioned to drive change. Deloitte's new report, "Striking the Balance: How and Where Will O&G Producers Deploy their Cash?," examines how oil and gas companies can play a key role over the next decade in creating synergy between energy security and energy transition, while helping commercialize essential low-carbon technologies.

Disruptions of the past two years on the oil and gas industry — including shifts in consumer behavior and supply chain challenges — combined with years of underinvestment and financial discipline, have helped to drive oil prices to past highs and cash flows to record levels. According to the study, the ongoing energy readjustment is likely to keep prices elevated for a while, possibly resulting in record cash flows and helping the industry to strike a healthy balance between energy security, diversification, and transition.

• The industry's cash generation is running ahead of the oil price cycle and capital discipline is now a practiced norm for most.
• Global upstream free cash flows could reach a record of as much as $1.4 trillion in 2022².
• While the North American upstream industry cumulatively generated only $47 billion in free cash flows over the last decade (2010-2020) due to losses in shale plays, the industry is expected to generate up to $600 billion in free cash flows between 2021-2022, a 13x increase from 2010-2020³.
• Shale producers, which generated negative cash flows in nine out of the last 10 years, will likely witness record high free cash flows in 2021-2022 that could overcome the decade long loss of $300 billion⁴.

The industry has been reducing debt, increasing efficiency, and practicing capital discipline for the past six years. After pausing reinvestments due to economic uncertainty, the oil and gas industry is exhibiting exceptional financial health and industry-leading returns at 20% leverage and 4% to 6% of dividend yield⁵. Even amid ongoing price volatility and supply chain disruption, many companies are strongly positioned for the future, though defining the road ahead will take time.

Significant investments could be required to strike a careful energy balance. According to the study, $3.6 trillion is the projected hydrocarbon capex at base price to maintain operations and generate significant cash flows from 2022 to 2030 globally⁶. However, the study also suggests that these investments will compete with growing priorities on cash that includes shareholder payouts, buybacks and debt repayment. Even after meeting both core hydrocarbon investment and shareholder priorities, the global upstream industry is likely to generate $1.5 trillion in cash surplus between 2022-2030⁷.

The cash surplus of $1.5 trillion could be deployed in several ways: it could move the needle on the industry's share of green capex from its current 5% to as much as 30%⁸, it could potentially kickstart the low-carbon economy, or it could be used to technically make the industry completely debt-free. While relatively lower internal rate of return investments in low carbon technologies could reduce the overall corporate IRR of an oil and gas company by 2.5% to 4%⁹. However, even with that investment, the industry's overall return profile could remain strong and close to previous highs, in addition to the added benefits of a lower emissions profile.

Despite its perceived volatility, the oil and gas industry has been accelerating its low-carbon commitments. For example, over the last three years, many oil and gas companies have reduced direct carbon emissions by 50%¹⁰. Further, oil and gas companies account for 75%¹¹ of the global investment in carbon capture, utilization and storage in 2021, and have doubled their renewable capacity in the last three years.

According to the study, affordable and accessible hydrocarbons are important to strike the right balance for a low-carbon economy. The pace and direction of this transition hinges on a supportive regulatory and stable policy environment, coordinated partnerships, and innovative business models.

"The oil and gas industry has faced real disruption over the past few years, some of which originated long before the Covid-19 pandemic began to make its impact. However, the unexpected result of this volatility is that the industry seems to be in a relatively strong position. Oil and gas companies have managed through change. Those who invest in new business models and remain resilient to the changing market dynamics will be more likely to sustain, lead and win throughout this energy transition."
—  Amy Chronis, vice chair, U.S. Oil, Gas and Chemicals Leader, Deloitte LLP

"Oil and gas companies are facing a readjustment in the broader energy market. Many companies have already committed to reducing carbon emissions and are making progress, amid geopolitical and economic uncertainty. Now, a financially healthy oil and gas industry is not only equipped with the technology, but also with the cash flows that could allow them to invest more quickly and create tangible change."
—  John England, Global Oil, Gas and Chemicals Leader, Deloitte Touche Tohmatsu Limited

Connect with us on Twitter at @Deloitte4Energy or on LinkedIn at @AmyChronis and @JohnEngland.

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¹ The analysis excludes the impact of the Inflation Reduction Act (IRA) of 2022, a bill passed by both chambers of Congress in August 2022. The bill contains a wide array of subsidies, taxes, credits, and pricing reforms, each with varying impacts on households and businesses. Additionally, the bill contains several energy, environment, and climate-related provisions that may influence production, cost competitiveness, profitability, tax payouts, and investment and share buyback decisions of US O&G companies. For more details, refer: The inflation Reduction Act (IRA)
² Deloitte analysis based on data accessed from Rystad Energy Ucube, and US Energy Information Administration, July 2022
³ Deloitte analysis based on data accessed from Rystad Energy Ucube, July 2022
⁴ Deloitte analysis based on data accessed from Rystad Energy Ucube, July 2022
⁵ Deloitte analysis, S&P Capital IQ, July 2022
⁶ Deloitte analysis based on modeling of data accessed from Rystad Energy Ucube and S&P Capital IQ
⁷ Deloitte analysis based on modeling of data accessed from Rystad Energy Ucube and S&P Capital IQ
⁸ Deloitte analysis, S&P Capital IQ, Rystad Energy Ucube database, July 2022
⁹ Deloitte analysis; S&P Capital IQ; Rystad Energy Ucube Upstream
¹⁰ Bloomberg, Deloitte analysis
¹¹ Deloitte analysis, and International Energy Agency "World Energy Investment 2022"

SOURCE Deloitte