Latin American NOCs set to increase capital spending in 2018

IHS Markit's Companies and Transactions team estimates that 2018 corporate budgets for Latin American NOCs will increase by roughly 15% versus 2017, as the group holds year-over-year production levels flat. We expect the publicly traded Latin American NOCs in the group to underspend cash flows.

The theme throughout the global oil and gas industry in the first part of 2018 has been one of continued capital discipline. This mantra is resonating with both Latin American E&Ps and NOCs, even though Brent oil prices have now rebounded by more than 50% versus their 2016 average.

We project that 2018 will be the first year that our wider Latin American peer group will have increased capex since the oil price crash in 2014, with a weighted-average 14% increase for the four NOCs versus 2017.

Figure 1: Capital spending patterns of the Latin American NOCs, 2014- 2018

Despite the increase in spending, we forecast Petrobras, Ecopetrol, and YPF to again underspend cash flows in 2018. This restraint marks the third consecutive year that Petrobras and Ecopetrol have spent less cash than they have generated from operations, and the second consecutive year for YPF. This group had consistently overspent cash flow in prior years.

The need to spend within cash flow is now paramount given their high debt leverage ratios, which, along with the lower oil price environment, has limited capital availability and stifled investment.

However, PEMEX will, again, outspend cash flows as production declines nearly 4%.

Figure 2: Forecast changes to production volumes for the Latin American NOCs, 2018-2019; Source: IHS Markit E&P Portfolio Tool

Although in 2018 the recent rise in oil prices improves inbound revenues versus 2017, we believe that the marked backwardation that remains in the oil-price futures curve will discourage companies from becoming too aggressive with their spending plans.

The industry still regards price volatility as a clear and present risk. And, as companies have now well learned, it is a risk best met with sustained prudent and appropriate capital restraint.

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Claudia Pessagno is a Principal Analyst, Companies & Transactions Research at IHS Markit within the energy business.

Posted 16 May 2018

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.