McKinsey: North American upstream operating cash flow to remain high into 2027

The report analyses historical cash flows and projected operational and financial performance for the leading 25 North American exploration and production (E&P) companies. Operating cash flows are projected to remain high, with levels between US$70 – US$90 billion in 2023 and between US$50 – US$70 billion to 2027 – even if oil prices drop to US$65 to US$70 per barrel.

The E&Ps analysed are expected to generate a total of US$140 – US$200 billion in operating cash flow in 2023. Operators are taking advantage of these high cash flows by pulling all the traditional levers of capital management. For example, industry debt load decreased by US$25 billion from 2021 to 2022 and is forecast to fall by another US$15 – US$20 billion by 2027. With debt burden reduced, returning shareholder value will be priority, and McKinsey expects dividends to climb to between US$30 – US$40 billion over the next year. But with a high volume of cash, these traditional levers will hit a natural cap. McKinsey’s analysis shows that only inorganic growth is unbounded going forward, suggesting that cash will be deployed through M&A.

Tom Grace, Partner at McKinsey & Company said: “Even after these uses of cash have been exhausted, the industry is likely to remain cash-flow positive in 2023 and beyond, with a ‘war chest’ of US$100 billion to US$230 billion. The primary tool left in the corporate finance toolkit is deployment of cash through M&A. A common refrain from industry veterans discussing M&A is, “You are either at the table, or you’re on it.” This is a harsh reality, but companies with strong M&A capabilities and bold strategies often exit the cycle fully fed and healthy.”

Industry trends suggest that multiple M&A strategies are driving this next wave of consolidation. Basin consolidators will likely look to add scale and leverage operational advantages to achieve outsized returns. Integrators may seek to add assets in adjacent portions of the value chain to expand margins and increase resilience. The bold will probably use a portion of their cash stockpiles to seed businesses to reshape their portfolios and position for the energy transition.

Jeremy Brown, Consultant at McKinsey & Company added: “The oil and gas industry is entering a period of unprecedented uncertainty characterised by the energy transition, evolving investor sentiment, and mounting energy security concerns. Now is not the time to bask in the glow of recent success. As in the past, successful industry players will work tirelessly to define and deliver a strategy rooted in sound M&A investments to accelerate their future growth and performance.”

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