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Bad Moon Rising - Diversified E&Ps Rebalancing Portfolios to Crude Oil as Natural Gas Revenues Sink

The recent bankruptcy filing by Tupperware, once a staple of nearly every kitchen, is yet another reminder that long-term corporate success depends on managing through the ever-changing business environment. Many blogs have been written about the ultimate impact on oil and gas producers of the decades-long shift to lower-carbon energy sources, but E&Ps face short-term challenges as well, one of which is the recent plunge in natural gas prices. In today’s RBN blog, we analyze the effect of lower gas prices on the revenues, cash flows, investment, leverage and cash allocation of producers with a rough balance of oil and gas production and discuss how these Diversified producers are adapting.

In the first part of our blog series on recent financial results from the 40 larger U.S. E&Ps we monitor, we said their pre-tax operating profits rebounded slightly in Q2 2024 to $12.25/boe ($16.6 billion), up 1.8% from the $12.04/boe they reported in Q1 2024. In the quarter, the group as a whole outperformed results from the turbulent half-decade between 2015-20 but fell short of the peak profits and cash flows generated in the post-COVID years. The primary reason was that low natural gas realizations nearly offset the impact of higher liquids realizations for the entire group. As we reviewed in the second part of this series, the brunt of the gas price plunge fell on the Gas-Weighted producers. With a portfolio weighting of just 16% liquids, the 11 gas-focused producers we cover had a brutal quarter. Pre-tax operating profits descended into the red in early 2024, with the group reporting an aggregate $850 million in losses in Q1 as revenues per boe dipped to the lowest level since the pandemic price crash in 2020.

The 13 Diversified E&P companies we track produced 50% oil, 35% natural gas and 15% NGLs in Q2 2024. However, their total revenue from hydrocarbon sales reflected weakening natural gas prices. In Q2, Diversified producers generated 85% of their revenue from crude oil, 8% from natural gas and 7% from NGLs, compared with 80% from oil, 13% from gas and 7% from NGLs in the previous quarter. Total revenue from natural gas fell by 37%, or more than $1 billion, to just $1.8 billion, which nearly offset a $1.3 billion increase in oil revenue to $19.5 billion. Particularly hard hit were the producers with Permian assets, many of which have been hurt by often-negative gas prices at the Waha Hub in West Texas (see Don’t Blame Me).

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