Petroleum Business Strategies for Maintaining Positive Cash Flow and Corporate Liquidity Under Volatile Oil and Gas Prices as the Sustainable Energy Transition Unfolds
Journal of Finance and Accounting
Volume 5, Issue 1, January 2017, Pages: 34-55
Received: Nov. 5, 2016;
Accepted: Dec. 1, 2016;
Published: Feb. 10, 2017
Views 4150 Downloads 189
Maria do Socorro Cirilo Agostinho, Harold Vance Department of Petroleum Engineering, Texas A&M University, TAMU College Station, Texas, USA; Department of Environmental and Technological Sciences, Federal Rural University of the Semiarid Region-UFERSA, Mossoro, Rio Grande do Norte, Brazil
Ruud Weijermars, Harold Vance Department of Petroleum Engineering, Texas A&M University, TAMU College Station, Texas, USA
To determine how the financing strategies and tactics of petroleum companies are affected by volatile market conditions, a cash-flow analysis was conducted of 30 oil companies with market capitalization ranging from USD 95 million (juniors) to USD 360 billion (majors). Our focus is on two critical recovery periods: 2004-2008 and 2009-2014. These intervals of market recovery are separated by the Great Recession of 2008-2009. The companies are divided into six traditional peer groups, classified by market capitalization and credit rating: oil majors, public private partnerships (PPP oils), independents, unconventionals, small caps, and juniors. Our analysis indicates that a high impact commodity price shock such as occurred during the global recession of 2008/2009 is more damaging to smaller companies than to bigger companies. However, post-recession data indicates that several of these smaller companies were able to recover and modify their practices to better protect themselves against future recessions. Smaller companies reduced dependence on external financing (from 35% to 15%), and of 16 companies in the “smaller” classification, 5 completely eliminated the need for long-term borrowing due to significant improvement in retained earnings. Success factors identified in this study include balancing capital expenditure with cash flow from operations, diversifying investments, divestiture of some assets, and focused efforts to reduce cash operating costs.
Maria do Socorro Cirilo Agostinho,
Petroleum Business Strategies for Maintaining Positive Cash Flow and Corporate Liquidity Under Volatile Oil and Gas Prices as the Sustainable Energy Transition Unfolds, Journal of Finance and Accounting.
Vol. 5, No. 1,
2017, pp. 34-55.
Weijermars, R., Bahn, O., Capros, P., Das, S. R., Griffiths, S., Lund, H., Rogner, H.-H., Taylor, P., Wei, Y.-M., Liao, H. and Shi, X., 2012. Energy Strategy Research: Charter and Perspectives of an emerging discipline. Energy Strategy Reviews, vol. 1, p. 135-137.
GEA, 2012: Global Energy Assessment-Toward a Sustainable Future. International Institute for Applied Systems Analysis, Vienna, Austria and Cambridge University Press, Cambridge, UK and New York, NY, USA.
Murray, J. and King, D. 2012. Climate policy: Oil’s tipping point has passed. Nature 481 (7382): 433-435. http://dx.doi.org/10.1038/481433a.
IEA, 2016. World Energy Outlook. http://www.worldenergyoutlook.org/.
Weijermars, R. 2011. Can we close Earth’s Sustainability Gap? Renewable & Sustainable Energy Reviews, Vol. 15, p. 4,667–4,672.
C. A. Dahl, International Energy Markets: Understanding Pricing. Policies and Profits, PennWell Corporation, Tulsa, Oklahoma, 2004.
J. Barron, As cash flow flattens, major energy companies increase debt, sell assets. U. S. Energy Information Administration, Independent Statistics and Analysis, 2014. http://www.eia.gov/todayinenergy/detail.cfm?id=17311 (accessed 01.07.2015).
R. Weijermars, O. Clint, and I. Pyle, 2014. Competing and partnering for resources and profits: Strategic shifts of oil majors during the past quarter of a century. Energy Strategy Reviews, 3, (2014): 72-87. doi: 10.1016/j.esr.2014.05.001
D. Hannesson, Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production, Quorum Books, Westport, Connecticut, 1998.
P. Osmundsen, K. Mohn, M. Emhjellen, and F. Helgeland, Size and Profitability in the International Oil& Gas Industry. In: The Changing World of Oil: An Analysis of Corporate Change and Adaptation, ed. J. D. Davis, Part 1, Sec. 2, 13–28, Ashgate Publishing Limited. Hampshire, UK, 2006.
A. C. Inkpen, M. H. Moffett, Global Oil and Gas Industry: Management, Strategy, and Finance, PennWell Corporation, Tulsa, Oklahoma, 2011.
S. Tordo, B. S. Tracy, and N. Arfa, National oil companies and value creation, World Bank Publications no. 218, VA, USA, 2011, 148 pp. http://siteresources.worldbank.org/INTOGMC/Resources/9780821388310.pdf (accessed 07.07.2015).
M. A. Mian, Project Economics and Decision Analysis: Deterministic Models (Vol. 1), Pennwell Books, 2011.
R. Weijermars, Credit ratings and cash-flow analysis of oil and gas companies: competitive disadvantage in financing costs for smaller companies in tight capital markets. SPE Economics & Management, 3 (02), (2011), 54-67. SPE-144489. doi: 10.2118/144489-PA.
W. Rodrigues, R. Weijermars, Assessing the impact of two recessions on the oil and gas industry: severity of declines and future outlook. First Break, vol. 34 (1) (2016), 79-85.
R. Weijermars, Bigger is better when it comes to capital markets and oil company liquidity. First Break, 28 (6), (2010), 37-41.
T. Jury, Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data (2nd Edition). Hoboken, John Wiley & Sons, NJ, USA, 2012.
C. J. Wright, R. A. Gallun, Fundamentals of oil & gas accounting. PennWell Books, 2008.
J. Bajkowski, 1999. A look at the corporate cash flow statement. American Association of Individual Investors Journal, vol. 21 (June), (1999), 26-29. http://www.aaii.com/journal/article/a-look-at-the-corporate-cash-flow-statement (accessed 23.06.2015).
J. Livnat, P. Zarowin, The incremental information content of cash-flow components. Journal of Accounting and Economics 13 (1), (1990) 25–46. doi: 10.1016/0165-4101 (90)90066-D.
Weijermars, R., and Watson, S., 2011. Unconventional Natural Gas Business: TSR Benchmark and Recommendations for Prudent Management of Shareholder Value. SPE Economics & Management, vol. 3, no. 4 (Oct.), p. 247-261, (SPE paper 154056).
J. Jewell, M. Livingston, A Comparison of Bond Ratings from Moody’s S&P and Fitch IBCA. Financial Markets, Institutions and Instruments 8 (4), (1999), 1–45. doi: 10.1111/1468-0416.00029.
R. Sylla, A Historical Primer on the Business of Credit Rating. In Ratings, Rating Agencies and the Global Financial System, ed. R. M. Levich, G. Majnoni, and C. Reinhart, Part 1, Sec. 1, 19–40. The New York University Salomon Series on Financial Markets and Institutions, Kluwer Academic Press, Norwell, Massachusetts, 2002.
K. Lee, S. Ni, and R. A. Ratti, Oil shocks and the macro-economy: the role of price variability. The Energy Journal, Vol. 16 (4), (1995), 39-56.
Energy Information Administration (IEA). 2008. World Energy Outlook–Oil and Gas Production Prospects. Chapter 10, 221-248. http://aie.org.au/AIE/Documents/IEA_WEO_2008_Oil_Production_Chapter10.pdf (accessed 02.07.2015).
R. J. Kish, K. M. Hogan, and G. Olson, Does the market perceive a difference in rating agencies? The Quarterly Review of Economics and Finance 39 (3), (1999), 363–377. doi: 10.1016/S1062-9769 (99)00005-8.
Haynes and Boone, 2016a. Oil patch bankruptcy monitor. May 16, 2016. http://www.haynesboone.com/~/media/files/attorney%20publications/2016/energy_bankruptcy_monitor/oil_patch_bankruptcy_20160106.ashx.
Haynes and Boone, 2016b. Oilfield services bankruptcy tracker. April 29, 2016. http://www.haynesboone.com/~/media/files/attorney%20publications/2016/ofstracker.ashx.