Upstream free cash flow is at a high level, oil and gas companies control capital expenditures

Starting in 2021, the world economy has gradually recovered from the new crown epidemic, and oil and gas prices have also risen. As a result, the free cash flow created by oil and gas companies has increased significantly.Especially in 2022, the Russian-Ukrainian conflict broke out and oil and gas prices rose sharply. The total free cash flow generated by the exploration and development activities of listed oil and gas companies around the world increased by 50% to more than US7700 billion, a record high.In 2023, although this data has declined, it is still at a historically high level.

It is worth noting that the business philosophy of U.S.-listed oil and gas exploration and development companies, especially shale oil and gas companies, has changed.These companies have focused on debt repayment and shareholder return (increased dividends and stock repurchases) since the fourth quarter of 2019.At the same time, upstream oil and gas mergers and acquisitions transactions have become more active.Through integration, large oil and gas companies have achieved economies of scale and synergies, which can effectively reduce development costs, thus creating very high free cash flow.

Although free cash flow has been abundant in recent years, oil and gas companies, especially international oil companies, generally adhere to capital discipline and control capital expenditure at a low level.According to Ruizide Energy's data, their average investment ratio (annual capital expenditure divided by operating cash flow) is at a historical low, 39% in 2021, 32% in 2022, and 51% in 2023, respectively, and is expected to be 53% in 2024.

After the epidemic, global upstream oil and gas investment has resumed growth.Last year, global upstream investment in oil and gas increased by about 12%, including double-digit growth in both deep-water and shallow-water fields, while the shale field increased by only 6%.The growth of investment in the deep-water oil and gas field is mainly driven by Brazil, Guyana and other countries, while the growth of investment in the shallow-water oil and gas field is mainly driven by the LNG expansion project in Qatar.This year, global upstream oil and gas investment growth is expected to slow to 4%, of which the deepwater sector will maintain a 10% growth, while investment in shale oil and gas will decrease by 6%.

Last year, the total investment in projects that made the final investment decision (FID) in the upstream of global oil and gas increased significantly, reaching more than US2200 billion, which is at a historically high level, mainly driven by LNG construction and shallow-water oil and gas projects.In terms of regions, North America, the Middle East and Europe have seen more growth.However, it is expected that the total amount of FID project investment in the upstream of global oil and gas in 2024 will be lower than last year.

Exploration investment and discovered reserves are at a low level, and the dominant position of deep-water oil and gas is highlighted.

With the outbreak of the shale oil and gas revolution, the entire oil market was oversupplied and oil prices fell rapidly, which had a huge impact on the entire oil and gas industry and seriously impacted the exploration field.In 2016, global oil and gas exploration expenditures fell to a level of more than US555 billion, less than half of the 2013 high.Since 2020, due to the impact of the new crown epidemic and the energy transition, global oil and gas exploration expenditure has been at a relatively stable low level, basically remaining in the range of 40 billion—50 billion US dollars.

From 2000 to 2010, an average of 35 billion barrels of oil equivalent were discovered worldwide, of which deep—water oil and gas accounted for 30%.In recent years, the overall oil and gas reserves discovered by global exploration have shown a downward trend.From 2011 to 2023, the average annual discovery of oil and gas in the world was only 18 billion barrels of oil equivalent, of which deep—water oil and gas accounted for 50%.Due to the decline in new reserves and the insufficient replacement rate of oil and gas reserves, the global replacement rate of oil and gas reserves in the past two years has been less than 20%.

In deep-water oil and gas exploration, the most successful is South America.Since 2015, among the world's top 30 deep-water oil discoveries, South America has accounted for 77% of the oil and gas reserves discovered, of which Guyana accounts for more than 65%.Suriname is also very successful, with several larger discoveries.In addition, Africa is also a relatively successful region. For example, Eni discovered the Venus oil field in Namibia in 2022, which became the world's largest oil and gas discovery that year.

Judging from the value of exploration, from 2015 to the present, global oil and gas exploration has created a value of more than 130 billion US dollars.Among them, the best performing country is Guyana, which accounts for about 50% of the world's value, has the largest newly discovered reserves, and the discovery cost is relatively low.The second is Turkey, mainly thanks to the discovery of the Turkish Petroleum Corporation (TPAO) in the Black Sea.The third place is Canada, mainly because of the discovery of some heavy oil fields.Then there are Suriname, Namibia, etc.

Judging from the deep-water block exploration permits obtained, large international oil companies have an absolute advantage.From 2017 to 2023, the top five oil companies that have acquired the area of deepwater blocks are Shell, Total Energy, ExxonMobil, Eni and bp.Of the 36 “high-impact” wells expected this year, 32 are located offshore, and 16 are with the participation of large international oil companies.In the field of deep-water oil and gas, which large international oil companies attach great importance to and widely participate in, there may be major discoveries in the next few years, which is expected to reverse the decline in new reserves to a certain extent.

Upstream M&A transactions tend to be active, North American shale assets are favored

In 2023, the value of global upstream oil and gas mergers and acquisitions transactions soared to US2259 billion, a record high.North America has always been a very active region for upstream mergers and acquisitions, which is determined by the special market environment with many participants.In 2023, the value of upstream oil and gas mergers and acquisitions in North America will reach more than US1160 billion, which is more than the global transaction value in 2022.In addition, the value of transactions in South America has increased significantly, mainly due to Chevron's acquisition of Hess.

There are two main reasons for the surge in the value of global upstream oil and gas mergers and acquisitions in 2023.First, the transaction volume and proportion of large international oil companies have increased significantly.In 2023, the proportion of the transaction volume of large international oil companies in the global transaction volume will increase significantly from 11% in 2022 to 55%, realizing the transition from net sellers to net acquirers.The second is that the transaction volume in North America has increased significantly.In 2023, the transaction volume of North American shale oil and gas assets will nearly triple compared to 2022, and the proportion of transaction volume will also increase significantly.

Of the 32 major transactions that occurred in 2023, North America accounted for the vast majority, reaching 22; large international oil companies participated in 9.In addition, with the accelerated integration of shale companies in North America, market participants have undergone major changes.In 2020, the top three U.S. oil companies in shale oil production were EOG Resources, Occidental Petroleum, and ExxonMobil.It is expected that the top three this year will be ExxonMobil, ConocoPhillips and Chevron.

In the process of asset trading, these oil companies pay great attention to energy transformation and reducing carbon emissions.They tend to sell assets with higher carbon emissions and purchase assets with lower carbon emissions.For example, ExxonMobil's acquisition of Denbury Resources can use the latter's carbon dioxide pipeline to develop its carbon capture and storage (CCS) business.Since 2019, large international oil companies have divested 24.5 million tons of high-carbon upstream assets through transactions.

Since the beginning of this year, nearly US660 billion in transactions have been completed in the upstream of global oil and gas.Transactions are still dominated by North American shale oil and gas, accounting for more than 80%; major transactions include Diamondback Energy's acquisition of Endeavor Energy Resources and Chesapeake Energy's acquisition of Southwest Energy.At present, there are nearly 150 billion U.S. dollars worth of assets waiting to be traded in the market, still mainly in North America, accounting for about 50%; followed by Africa, accounting for 16%.It is expected that global upstream oil and gas mergers and acquisitions will not be as active this year as last year, but the possibility of major transactions is not ruled out.(Chen Linrui, senior upstream analyst of Zhide Energy).