Free cash flow is king in 2017: Oilweek outlook survey

Despite depressed oil and gas prices being expected to continue well into 2017, a majority of companies do not anticipate difficulty accessing financing for operations, according to Oilweek's 2017 Oil & Gas Industry Outlook Survey, a further sign the worst of the downturn in the oilpatch may be coming to a close.

Almost half of respondents said operations financing would primarily come from free cash flow in 2017, while 11 per cent said it would come from debt, nine per cent from equity and six per cent from the proceeds from divestments (25 per cent were unsure).

Additionally, of those planning to solicit capital in 2017 (34 per cent indicated they won’t need to raise capital), 16 per cent said they would be seeking only specific sources of capital and were optimistic about getting what they require, and 13 per cent said they would be seeking capital from all sources and were optimistic about getting it. That compares to nine per cent and six per cent that were not optimistic about securing necessary capital from specific or all sources, respectively.

Among sub-industries, the exploration and production sector is most likely to assume financing will come through free cash flow (56 per cent) and least likely to be taking on debt (eight per cent), with another eight per cent counting on equity, while 46 per cent of oilsands company respondents anticipate relying on free cash flow, 10 per cent on debt and 12 per cent on equity.

About nine per cent of both sectors suggest divestments will finance operations, compared to three per cent of service and supply company respondents and no midstream/pipeline respondents. The latter two sectors lean more on debt, at roughly 14 per cent of respondents, while almost half of both sectors cite free cash flow as the primary means of financing operations.

In general, the smallest companies, those with fewer than 100 employees, were most likely to forecast greater reliance on debt than free cash flow compared to larger firms. And where capital is sought, from either specific or all sources, the smallest companies are least optimistic about securing it, and the largest companies, those with more than 1,000 employees, were most optimistic, reflecting the greater ease of raising funding among larger firms with more assets.

Fortunately, the smallest companies are also the least likely to be seeking capital—38 per cent said they don’t need to, compared to 29 per cent of the largest companies.

Company executives and management/administration staff are particularly confident in raising financing via free cash flow, at 59 and 54 per cent respectively, compared to just 42 per cent of the analyst/adviser/consultant group (which also scored higher in the “unsure” category). On the other hand, the analyst/adviser/consultant group is most optimistic about organizations securing what they require, while executives are least optimistic.

An analysis from CanOils in 2016 found that while the total value of Canadian oil and gas company financing arrangements being completed has fallen since the commodity price downturn, companies have still been able to raise finance. Looking at all TSX- and TSX-V-listed oil and gas companies that produced up to 100,000 boe/d in their operational results, CanOils found that around $8.6 billion in gross proceeds was raised between 2015 and 2016 (down from $13 billion in 2014) with either equity financing or debt financing, and it was increasingly trending to equity-based arrangements rather than debt.

With capital expenditure budgets slashed across the board and companies focusing on sustaining operations rather than development during the nadir of crude pricing, repaying debt was the main motivational factor behind most deals in 2015 and 2016, CanOils says. There was also a significant amount of cash raised to fund acquisitions and pay off the debt included in those acquisitions.

For example, in August, Seven Generations Energy, after acquiring Paramount Resources’s Montney assets for $1.9 billion, closed its bought-deal equity financing to raise gross proceeds of $747.66 million by issuing 30.7 million subscription receipts that included four million subscription receipts issued pursuant to the fully exercised over-allotment option granted to a syndicate of underwriters.

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