Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

4. Profitability and Corporate Finances Many companies on the UKCS are reliant on cash-flows from existing operations to fund maintenance and new development projects. With profitability at an all-time low given the market downturn, companies have had to borrow more money to fund ongoing commitments. 4.1 Profitability Free cash-flow generated on the UKCS is a function of three key variables: price, production and costs. The impact of the fall in oil and gas prices will be partially offset by the sharp decline in capital investment, the continued operating cost reductions and further increases in production. Although the free cash-flow picture for the UKCS has improved from the £4.2 billion deficit last year, there is still likely to be a £2.7 billion deficit in 2016. When existing operations are generating marginal, if any, returns for investors, the prospect of raising further capital to invest in new projects is extremely difficult, as shown by the lack of new commitments this year (see section 5.3). This has caused a knock-on effect on profitability throughout the supply chain as projects are postponed or cancelled (see section 6 for more on the supply chain).

Figure 9: Revenue, Expenditure and Post-Tax Cash-Flow

70

Gross Revenue

60

Post-Tax Expenditure

Post-Tax Cash-Flow

50

40

30

20

10

0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Cash-Flow (£ Billion - 2015 Money)

-10

-20

Source: OGA, Oil & Gas UK

20