Wood Mackenzie Exit
LONDON / HOUSTON / SINGAPORE, December 8, 2021 – It will be a busy year for the majors, independents and national oil companies. The major choices will define the strategic trajectories of the energy transition to come.
New research from Wood Mackenzie, a company of Verisk (Nasdaq: VRSK), indicates that oil and gas companies are likely to be bold in 2022. A formidable generation of cash flow, increased new energy opportunities and development of a carbon market are a powerful force for currency.
Tom Ellacott, senior vice president of business analysis, said, “2022 has the potential to be a truly transformational year.
“It is clear that staying on the sidelines of decarbonization is not an option. As the pressure from stakeholders intensifies, it is time to make big strategic decisions. These choices will chart energy transition trajectories which will only accelerate. Wood Mackenzie looks forward to an exciting 12 months.
Large publicly traded companies will prepare for more regulatory, legal and investor challenges. The interconnected network of stakeholders creates an amplifying effect – stakeholders have stakeholders, and everyone is under increasing pressure to decarbonize. The relative success of COP26 adds an additional urgency to action on carbon.
David Clark, vice president of business analysis, said international energy companies – and many domestic oil companies – will need to start preparing for a common set of rules that rate their progress at net zero.
“Investors will increasingly compare decarbonization progress against their peers and against other industries. Laggards to decarbonization may start to face reduced assessments and rising funding costs, fueling actions to move up the rankings of core indicators, ”he said.
Growing pressure from stakeholders could force US majors and large independents to adopt European major-style net zero commitments. More national oil companies will publish interim absolute carbon reduction targets given the critical role they will play in achieving nationally determined contributions and long-term net zero ambitions.
“Next year, cash-rich companies could ‘do it all’ if today’s prices hold. Indeed, increasing distributions to shareholders while decarbonizing and repositioning for the energy transition will be essential to rebuild the history of investing, ”said Clark.
Wood Mackenzie’s analysis indicates that deleveraging will have to continue. Many companies have committed to using excess cash for buyouts and dividend growth, as well as limiting rates of capital reinvestment. The industry needs US $ 50 / bbl of Brent to break even on a cash flow basis after dividends and outright buyouts in 2022. Buyouts could set records if high prices continue.
Oil and gas companies will invest in low carbon emissions at record levels to boost sustainability. The foundations laid in 2022 will support the increased allocation of capital from old to new energy over the decade.
While wind and solar will see the biggest expenses, Wood Mackenzie expects the strategic discourse to broaden in 2022 as the capture, use and storage of carbon and hydrogen increases. generalize.
Clark added, “More companies will also seize the opportunity to secure oil and gas portfolios. Even oil and gas pure-plays will have to align growth aspirations with increasing stakeholder pressure for Paris alignment. Emissions reduction and portfolio repositioning will dominate the strategic agenda. “
Wood Mackenzie believes cutting upstream emissions could exceed expectations as companies push profitable decarbonization to its limits. The deployment of offsets could increase – perhaps significantly – with the argument that these are dummy parameters as longer term options are implemented.
The M&A market is expected to be very active in 2022. Greig Aitken, director of business analysis, said: “The US Lower 48 will again be at the epicenter of business consolidation. But it will spread to other regions, such as the North Sea.
“Companies will also take advantage of a window of opportunity to rationalize their portfolios in 2022, wary of long-term pricing and regulatory risks. Many other players will be able to buy and will see an opportunity to sweep the cash-generating assets for implied valuations as low as US $ 50 / bbl.
“The majors will remain net sellers of oil and gas. Shell’s recent US $ 9.5 billion Permian divestiture highlights previously untouchable assets could end up in the market. “
Large acquisitions (US $ 5-10 billion) outside of upstream oil and gas appear more likely than not in 2022.
“Oil and gas companies are starting to think left as they take on the challenge of energy transition,” Aitken said.
“More internal M&A teams will assess completely different asset classes than in the past, from new low-carbon solutions to critical resources for the energy transition. It’s probably too early to expect large investments in these entirely new assets and technologies, but we expect to get any clues as to what is of long-term interest.