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Wintershall Dea joins the capex cutters

The independent producer is the latest to announce reduced spending in the new price and demand environment

German E&P and midstream firm Wintershall Dea will cut its planned 2020 development capex by 10pc from initial expectations as it joins the club of upstream operators focusing on trying to lower costs. But its measures may not be enough to deliver free cash flow (FCF). 

The company plans to spend €1.2-1.5bn ($1.3-1.7bn) on development capex in 2020. This is down from expectations but comparable to 2019 expenditure should spend come in at the very top of the range. Wintershall Dea’s exploration budget will, though, see a significant year-on-year reduction, down to €150-250mn in 2020 compared with €340mn last year. 

But, despite trumpeting its low production costs—$4.70/bl oe in 2019 compared with an industry average of $8/bl oe—the firm’s CEO Mario Mehren cautions that generating FCF after fully funding even these revised budgets will be challenging in 2020. The firm needs average prices of $35-40/bl for oil and $4/’000 ft³ for gas, says Mehren, although these numbers will fall materially in 2021 as a number of development projects come onstream and Wintershall Dea comes off its capex plateau. 

€1.2-1.5bn – 2020 development capex

Since the completion of the 2019 merger between Wintershall and Dea, the company’s focus has been on making promised cost reductions and streamlining its portfolio. The firm is on track to deliver a promised €200mn of cost synergies by 2020, says Mehren, while it has sold down stakes in Argentinian projects to US independent ConocoPhillips, divested stakes in Norwegian midstream infrastructure and also rationalised its German production assets. 

M&A opportunities 

But, without identifying specific targets, Mehren says the company will look at potential M&A opportunities that the impact of the current industry environment might offer. He flags Russia and Argentina as particularly low-cost areas where Wintershall Dea is active. 

Despite growing production in 2019 by 9pc year-on-year, to over 640,000bl/d oe, the firm’s “goal is not to set production records every year”, says Mehren. It will target quality over quantity. Given the challenges expected, particularly in the first half of 2020, the current production guidance for the period is 600,000-630,000bl/d oe. That includes an assumption of zero contribution from Libya, where Wintershall Dea’s assets are currently shut-in due to a lack of export options. 

Mehren acknowledges that his company’s shareholders want to take it public, and an IPO will be “on the starting blocks from the summer”. But any launch of the process will be dependent on market conditions, so there is no firm timetable.

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