Oil majors are set for dramatic rebound

The world’s largest oil companies are poised for a sharp recovery from the worst oil bust in decades, according to a new report.

Global energy consulting firm Wood Mackenzie said 40 of the largest oil companies are emerging from the pandemic-driven downturn more resilient to low crude prices after slashing budgets and focusing on low-cost, high-return projects. On average, it says, the large oil companies can break even when West Texas Intermediate, the U.S. crude benchmark, is priced at $38 per barrel, down from $54 per barrel before the pandemic.

If U.S. crude prices this year average around $55 per barrel, oil majors are estimated to have total revenue of about $140 billion, more revenue than during any year since 2006. If the average price rises to $70 after the pandemic ends, as some experts predict, revenue could rocket to $400 billion, Wood Mackenzie said.

“The record annual losses being announced in the fourthquarter earnings season serve as a stark reminder that 2020 was one of the toughest years in the industry’s history, but international oil companies emerged from the crisis far more resilient to lower prices,” said Tom Ellacott, Wood Mackenzie’s senior vice president of corporate analy

sis.

Instead of reinvesting revenues in new oil and gas projects, large oil companies are expected to shore up balance sheets, pay down debt and sell lowermargin assets, Ellacott said. Oil majors, in particular, are eager to woo skeptical investors back to the energy sector after years of middling performance.

“The sector is in ultracapital-disciplined mode to win over investors,” Ellacott said. “We think the industry will stick to its tight management of investment for some time.”

There are concerns that a failure to invest enough in new projects could lead to a supply crunch in the coming years as companies scale back spending to focus on paying down debt. More mergers and acquisitions are expected as companies seek to maintain production levels.

At the same time, large oil companies are under pressure from shareholders and regulators to invest heavily in low-carbon energy. Oil majors will need a disciplined approach to allocate capital to renewable energy, Wood Mackenzie said.

“Strategically, the move away from volume growth and toward harvesting the legacy oil and gas business is part of the energy transition reality — one in which pressure to decarbonize is only heading in one direction,” Ellacott said.