Oil producers are on track to hit $1.4 trillion in free cash flow


Free cash flow – the amount of money a company has after accounting for operations and capital expenditures – could help the industry pay down debt, return cash to shareholders in the form of dividends or buybacks and boost investment in low-carbon energy companies, London-based consultancy Deloitte said Thursday.

Despite fears of a recession, profits and revenues in the energy sector have soared this year. Deloitte attributes these strong results to high oil and gas prices, coupled with investor demand for “disciplined spending.”

Go back about a decade, and things were a little different: From 2010 to 2020, oil and gas drillers in North America generated an annual free cash flow of about $47 billion, according to Deloitte, due to losses in shale deposits.

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“The oil and gas industry has faced some real disruptions over the past few years, some of which emerged long before the COVID-19 pandemic began to have its impact,” said Amy Chronis, vice president of the American Oil, Gas and Chemicals at Deloitte. “However, the unexpected result of this volatility is that the industry appears to be in a relatively strong position.”

Burned by years of overspending, particularly in U.S. shale fields such as Texas’ Permian Basin, investors have asked companies to curb growth in terms of land acquisition and instead focus on increasing efficiency and return of money to shareholders.

The bottom line: In just two years (2021 and 2022), the North American oil and gas industry is expected to generate 13 times the amount of free cash flow it has generated over the past decade, or $600 billion. Deloitte analysts said shale producers – which have generated negative cash flow in nine of the past 10 years – will likely see enough free cash flow in 2021 and 2022 to overcome the estimated decade-long loss. at $300 billion.

In addition to paying down debt and returning cash to shareholders, the record free cash flow expected in the coming years could ‘move the needle’ on the transition to low-carbon energy sources , Deloitte analysts write in the report.

Even after debt reduction, dividends, buyouts and investments in oil and gas operations, Deloitte estimates that by 2030 the global exploration and production industry will reap an additional cash surplus of $1.5 trillion. This could boost industry capital spending on low-carbon technologies by 5 to 30 percent, according to the report.

“Those who invest in new business models and remain resilient to changing market dynamics,” Chronis said, “will be more likely to support, lead and win through this energy transition.”

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