Oil & Gas Industry Outlook 2024 : Financials & Demand in the Climate Era

The global oil and gas industry faces a critical moment in 2024 as global efforts to achieve net-zero emission by 2050 take center stage. How are the industry’s cash flow trends responding to the growing pressure to diversify?

Today, the world is witnessing a transition in its energy dependencies—from hydrocarbons to those that emit less carbon emissions into the atmosphere.

While necessary, this energy transition presents a dual challenge: securing investments in low-carbon emitting energy sources while continuing to use traditional hydrocarbons to meet growing global energy demands.

The financial health of the oil and gas industry is important in navigating this transition as well as the dual challenge it poses.

The goal of this article is to analyze the oil and gas industry’s financials—to be more specific, their cash flow trends over the past five years . These trends will provide a clear indication of the industry's historical financial health, spending habits, and future outlook. 

But, before diving into the technical analysis of cash flow trends, it’s essential to grasp the basics of how the industry operates and the scale of its market. 

Let’s begin by analyzing that first!

The Global Oil & Gas industry is valued at $7Tn

In 2023, according to the Kings Institute, the global oil and gas industry was valued at approximately USD 6.7 trillion, with projections estimating growth to USD 8.9 trillion by 2031 at a CAGR of 3.68%.

The industry is divided into three main sectors: 

• Upstream: Exploration and extraction
• Midstream: Transportation and storage 
• Downstream: Refining and distribution 

These sectors are interconnected, forming a global supply chain that powers industries, heats homes, fuels transportation, and contributes to the production of countless goods.

The market is also characterized by its volatility, influenced by factors such as geopolitical tensions, regulatory changes, technological advancements, and fluctuations in supply and demand. 

Despite the push towards renewable energy, oil and gas continue to be dominant sources of energy, especially in transportation and industrial processes.

Now, let's examine the industry's Free Cash Flow (FCF) trend from 2019 to 2023 to understand how much cash the industry holds with itself today.

In 2023, the O&G industry enjoyed $67B in FCF

Over the past five years, the industry's financial landscape has shown fascinating trends.

Free Cash Flow (FCF) grew 10% yearly, reaching $67B in 2023, with Saudi Arabian Oil Co., ExxonMobil, and Shell PLC topping the list with the most FCF generated.

That’s impressive, but let’s focus more on “cash from operations” aka Net-OCF. Overall, the five-year average Net OCF is $58.83 billion, growing 7.27% yearly.

Here’s a year-wise breakdown:

• 2019: Net-OCF was $50.46 billion.
• 2020: Due to the COVID-19 pandemic, Net-OCF dropped sharply to $33.98 billion.
• 2021: The industry rebounded with a Net-OCF of $58.47 billion, reflecting a growth rate of 72.07%.
• 2022: The upward trend continued, with Net-OCF reaching $84.46 billion, a growth rate of 44.46%.
• 2023: Net-OCF declined to $66.80 billion, resulting in a negative growth rate of -20.91%.

Key factors driving positive growth in Net-OCF

According to Deloitte, there were three major reasons behind an increase in profitability for the industry.

1. Post-Pandemic Recovery: The industry experienced a strong rebound in 2021 and 2022 after a significant downturn in 2020 due to the COVID-19 pandemic. The surge in demand for oil and gas as economies reopened contributed to this recovery.
2. Increased Global Oil Demand: Global oil demand reached over 100 million barrels per day in 2023, driven by geopolitical factors such as sanctions on Russian oil. European countries, particularly Germany and France, turned to the Middle East for oil, leading to higher global oil prices and positively impacting industry revenue and cash flow.
3. Technological Advancements and Efficiency Improvements: The adoption of new technologies, including artificial intelligence (AI), has significantly improved operational efficiency, cost management, and profitability within the industry. AI-driven predictive maintenance has enhanced productivity, reduced costs, and increased operational reliability, contributing to positive growth in Net OCF.

Now that we have examined the O&G Industry’s FCF trends, let’s look at its debt trends over the past 5 years.

82% of total debt is long-term debt

In 2023, the oil and gas industry had $55 billion in total debt. The companies with the highest debt levels were Saudi Arabian Oil Co., Shell PLC, and PetroChina.

The industry's five-year average for total debt is $65.22 billion, with an annual growth rate of 4%. Notably, 82% of this debt is long-term, meaning the industry has spread its financial obligations over a longer period. This provides some stability despite fluctuations in total debt levels.

The oil and gas industry has a strong debt discipline. How?

1. Improved Financial Discipline: Post-2020, companies in the oil and natural gas industry have shown improved financial discipline by focusing on reducing their total debt. This has been achieved through better cash flow management and prioritizing debt repayments.
2. Strategic Debt Reduction Initiatives: Many companies initiated strategic debt reduction programs to strengthen their balance sheets. This includes refinancing existing debt at lower interest rates, selling non-core assets, and using the proceeds to reduce debt levels.
3. Enhanced Profitability and Cash Flow: The industry's profitability and Net Operating Cash Flow (Net OCF) have improved significantly post-2020, allowing companies to rely less on debt financing. This has been driven by rising global oil demand, technological advancements, and efficiency improvements.

Liquidity issues affect 20% of companies; solvency issues affect 40%

The data shows that most companies have healthy liquidity, as indicated by their Current Ratios. However, companies like PetroChina (0.98) and China Petroleum & Chem Corp. (0.78) have Current Ratios below 1, which suggests potential liquidity issues.

Debt-to-Equity Ratios reveal a wide range of leverage among these companies. Saudi Arabian Oil Co. (0.48) and Chevron (0.62) have lower leverage, indicating a more conservative use of debt. On the other hand, Marathon Petroleum Corp (2.3) and BP PLC (2.77) have much higher leverage, which could be risky if market conditions worsen.

Overall, while most companies show strong liquidity, the differences in financial leverage reflect varying strategies and risks within the industry. Companies with high leverage need to be cautious, especially in the volatile oil and gas sector where market conditions can change quickly.

What the future holds for the Oil & Gas industry?

The oil and gas industry is holding up well despite financial pressures and a growing demand to diversify energy sources. Most companies show strong cash flow and smart debt management, which indicates a solid financial base.

New technologies and better efficiency have also helped increase profits and reliability. The rising global demand for oil and gas, fueled by geopolitical factors and economic recovery, offers the industry a chance to benefit. Although some companies have concerns about liquidity and debt, the overall financial health of the industry is stable.

Looking ahead, the oil and gas industry seems to have a bright future. By adopting new technologies and adjusting to market changes, it is likely to stay relevant and sustainable in the face of climate change.