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S&P sees cost cutting, efficiencies continuing to boost cash flow for oil majors

Lower break-even prices after a period of cost cutting and efficiency measures should continue to drive cash flow for many of the largest U.S. integrated oil and natural gas companies this year, S&P Global Ratings said in a March 19 report.

Reduced spending as well as lower operating costs worked to boost free cash generation for these companies at a time when crude oil prices are trending at softer levels than those seen prior to 2014.

"Sustained cost cutting since 2014 and a continuing focus on efficiency through logistics optimization, design standardization, and digitization, among others, has rebased the cost profile of the upstream industry," the report said.

Additionally, while keeping a lid on capital expenditures, many of these same majors are likely to see production growth in the near-term.

"Chasing volume growth led to some of the previous decade's cost inflation. Demonstrably, this isn't happening now, reflecting a focus on profitable, high-margin barrels, especially from newer developments," Ratings wrote.

The analysts said that many of the recent larger production ramp-ups are a result of initial investment decisions made five years ago. While total capital invested may not equate to the fattest returns, the start-up and production costs are relatively modest.

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"The other point is that companies are now extracting much more bang for their development capex buck," the report said, pointing to weaker drillship rates and compressed construction margins. "In a nutshell, $100 million of development or oilfield spending goes a lot further now than five years ago."

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