Economic Report 2018

3.2 What do the Trends Mean for Industry? Increased commodity prices have a positive effect on the oil and gas industry, especially within E&P companies, through increased cash flow and a growing sense of optimism. As outlined in Business Outlook 2018 , Oil & Gas UK predicted that the UKCS could generate free cash flow of more than £7 billion this year, as a result of reduced costs, relatively low investment levels and increased commodity prices (based on estimates of $60/bbl and 45 p/th). However, following higher-than-anticipated oil and gas prices in the first half of 2018, it is possible that free cash flow levels this year could exceed £10 billion for the first time since 2010, with this figure being inclusive of an expected increased tax take for the government. The overall level of cash flow will be dependent on how commodity prices develop during the second half of 2018 and the industry’s ability to maintain its focus on cost discipline.

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Figure 6: Exploration and Production Revenue, Post-Tax Expenditure and Cash Flow

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Cash Flow (£ Billion - 2017 Money)

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Source: OGA, Oil & Gas UK

In recent years E&P companies have been focused on business transformation and, as a result of cost and efficiency improvements, are now in a much healthier position. However, it is important to note that the cash flow position of UKCS E&P companies will vary significantly, depending on operating costs and investment and production levels. The majority of the free cash flow being generated in the basin will come from a relatively small number of companies. It must also be acknowledged that a number of challenges persist for supplier companies. It is not certain that the increased cash flow in E&P companies will translate directly into new investment and much-needed new activity for the supply chain, at least in the short term. Companies remain focused on maintaining confidence, as evidenced through the maintenance of dividend payments throughout the downturn, demonstrations of sustained cost discipline, and the servicing of debt incurred over the last four years. In terms of their longer-term market outlook, major E&P companies remain highly conservative. This is in attempt to compensate for market volatility and signals that industry does not yet have the confidence that increased commodity prices will be maintained in the long term.

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