The breakeven price includes an Internal Rate ofReturn (IRR) of 10%, (where NPV=0), but does not allow any room for increased costs, or a fall in oil prices. It may also be insufficient to contribute to making a company cashflow neutral once it has covered other commitments such as dividends. Rystad therefore expect that an oil company would allow another $15 when making investment decisions, depending on its portfolio of projects. This means that a $60 breakeven project would bedependent on assuming a $75 Brent oil price.
What a load of crap. Breakeven price does not take into account ROR simply because the concept of breakeven means at what price does total expenditures get offset by total revenues net of all royalties, taxes and expenses. I know this given I had to calculate so many times over the years.
The way the banks calculate this is not single point (ie what happens today) but via a look at NPV of the project which means they use the banks price forecasts and cost forecasts. I’ve done that calculation as well and one uses historical average rise in costs to project into the future, at the same time there is a standard price deck used by most investment banks that offsets some of the rise in costs. Rate of return can fall out of this equation but it is not assumed in break even analysis. So to be blunt this person hasn’t a clue what they are talking about.
According to Bloomberg data, capital expenditure by the largest oil companies is now five times the level it was in 2000. Yet the production of the companies has barely increased. This continuing fall in capex productivity has been masked by the annual average Brent oil price rising to four times the level in 2000. The cost of producing the marginal barrel of oil is increasing. According to Goldman Sachs, over the past two years no major new project has come onstream below $70/bbl, with most in the $80–100/bbl range.
Please find a point in the last two years when oil (either Brent or WTI) was below $70 bbl? Of course no new project came on at that price…..it never was that price. What an absurd statement.
Companies also have to maintain other expectations alongside capital expenditure. Shareholders have become used to dividends. Goldman Sachs estimated in April 2013 that over half of the listed oil companies need oil prices above $120/bbl to be cashflow neutral.
Again easy to test….WTI has been well below $120/bbl and the vast majority of oil companies have been reporting profits not losses. It is a simple task to go to Sedar or SEC and look at the balance sheet for any company that are regularly filed. They always report profit before and after dividends. Many companies try to keep only enough profit to fund their next years capex requirements and dividend everything else to shareholders as this is most tax efficient. But they are not taking losses after dividends at prices in the $90 -$100 range.
And I believe there is a more recent solar company Obama backed that is about to go belly up as well.
