It seems a rude question to ask given it has barely started pumping but we must ask it given it is probably going to happen. UBS offers some guidance:
Our cash flow calculation includes minimum debt repayments, which for OSH is relatively significant (~US$300m/annum). But with $1.6bn in liquidity, OSH has the capacity to ride out lower oil prices for at least two years, in our view.
STO’s level of net debt should increase fairly rapidly at US$30/bbl oil, but with A$5.5bn in liquidity, we think STO has the balance sheet flexibility to ride out a sustained period of low oil prices. Key risk is around its investment grade credit rating rather than liquidity.
Overall, WPL needs US$28.40/bbl to generate positive FCF in 2016, on our forecasts, vs US$33.7/bbl for OSH and US$45.8/bbl for STO. Including debt and dividend payments increases the break-even oil price to US$36.80/bbl for WPL, US$51.40/bbl for OSH and US$54.90/bbl for STO.
Sub-US$40/bbl oil looks unsustainable; futures curve is an unreliable predictor While the market remains focused on the near-term outlook for oil, we think the seeds are being sown for the next oil-price boom. In the past week, ConocoPhillips and Chevron both announced 25% cuts to 2016 capex, and we expect this trend to continue for other majors. Outside of US shale, we see little to nothing coming through the growth pipeline globally. STO 2016 capex is forecast to be down 33% on 2015 levels, OSH down 40-50% and WPL (no guidance yet) should be down around 40%. With little growth investment under way, we can see a scenario where oil markets rebalance in 3Q16. In the meantime, markets continue to focus on the near term, which, absent a sudden supply shock, seemingly lacks the catalysts to justify an oil-price rebound. But beware: Oil futures are not a reliable predictor of future oil prices!
That can’t be right! If STO, and by implication ORG, have a cash breakeven of $45 then they are already losing real money. If that is the case then the entire Curtis Island complex is in dire straights. The plants will run long enough to exhaust credit lines in the hope of a price rebound then shut. The firms themselves are toast.
My own numbers have the cash breakeven lower at around $25-30 Brent. Though admittedly that is for only a limited time using up the cheapest gas.
Let’s hope I’m right because if not the Curtis Island white elephant is more like a dead duck.
