Memories of disasters linger, and it’s likely that no one in the North American energy sector is likely to ever forget the second quarter of 2020. As the COVID-19 pandemic destroyed demand and crude oil prices bottomed out, exploration and production companies (E&Ps) scrambled to shut in wells and slashed spending in the face of an unprecedented plunge in average realizations to less than $14 per barrel of oil equivalent (boe). Not everyone bought into apocalyptic visions of the industry’s future that were circulating widely, but few analysts expected the rapid return to the level of profitability reflected in the recently released second-quarter 2021 results of the 39 major E&Ps we monitor. Rising oil prices and continuing cost control propelled the earnings of the Oil-Weighted and Diversified peer group companies over the results from the last industry performance peak in the third quarter of 2018, when WTI was priced 10% higher. Although the results of Gas-Weighted producers lagged, soaring third-quarter natural gas prices suggest a catch-up in the second half of the year. In today’s blog, we analyze the second-quarter results of our universe of 39 producers and preview third-quarter results.
As we outlined in Walking on Sunshine, the 39 E&Ps we track returned to profitability in the first quarter of 2021, reporting total pre-tax operating earnings of $13.2 billion ($12.37/boe) and operating cash flow of $24.7 billion ($23.16/boe) — quite an improvement from losses totaling $52 billion in 2020. The driver was oil prices that averaged nearly $60/bbl in the first quarter as well as a reduction in impairment charges. Every company we follow was in the black — a welcome change.
The situation continued to improve in the second quarter, when an $8/bbl increase in oil prices pushed earnings up by 24% to $16.4 billion ($14.58/boe) and operating cash flows up 16% to $28.6 billion ($25.40/boe). The most dramatic results were posted by the Oil-Weighted and Diversified E&P peer groups. They reported pre-tax operating profits of $18.92/boe and $18.42/boe, respectively, exceeding the $18.70/boe and $14.77/boe they posted in the third quarter of 2018 — the previous peak for oil prices and industry profitability since the oil price crash of 2014. Even more remarkable is that even though oil prices averaged 10% higher in the third quarter of 2018, operating cash flows for the Oil-Weighted E&Ps matched the third-quarter 2018 results and Diversified E&P cash flows were 6% higher. Profitability for the Gas-Weighted E&Ps exceeded third-quarter 2018 results but dipped 17% from first quarter 2021 on sharply lower Appalachian realizations. Next, we’ll take an in-depth look at the pace of industry recovery for all three peer groups between the first and second quarters of 2021.
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