During 2020, Latin American oil and gas companies’ profitability is expected to decline to one third of 2019 levels, while cash flow is expected to remain under pressure through 2021 as recovery will likely be protracted, according to a new Fitch Ratings report.
“Full cycle costs are above price expectations for 2020, leading to negative cash flow generation,” said Lucas Aristizabal, Senior Director. “Companies will need to support their liquidity with CapEx and OpEx cuts, as well as access debt.”
With half-cycle costs below price expectations, almost all Latin American exploration & production (E&P) companies could generate enough cash flow to cover operating and administrative costs, and interest expenses, assuming production remains relatively flat. Fitch estimates that a 10% decrease in production could increase average half-cycle costs by up to $4/boe.
All vertically integrated Latin American oil and gas companies, most of which are national oil companies, benefited from vertical integration during 2019. Although materially lower demand for oil products in 2020 will hinder downstream cash flow generation, crack spreads are expected to remain positive, complementing cash flow generation from downstream businesses – notably for Ecopetrol, Petrobras and YPF. Pemex’s downstream business is not typically a material cash flow contributor.
Fitch expects Latin American oil and gas production to continue the declining trend observed in recent years.
Above photo: Ecopetrol’s refinery in Barrancabermeja, Colombia on the banks of the Magdalena RIver (courtesy Ecopetrol)