The plunge in crude oil prices that started in mid-2014 had a major and lasting impact on the 44 exploration and production companies (E&Ps) we’ve been tracking, triggering a $188 billion swing in net results — from $57 billion in pre-tax operating profits in 2014 to $131 billion in losses in 2015. Defying predictions of widespread bankruptcies, the industry undertook a dramatic strategic and operational transformation that enabled it to emerge from the abyss and return to profitability — albeit just barely — in 2017. Key factors in the industry’s impressive turnaround include the high-grading of portfolios, intense capital discipline and a laser-like focus on operational efficiencies. Today, we dive into the 2017 financial reporting of these companies to identify how these changes have affected income statements and set up the industry for future profitability growth.
In our recent Wind of Change blog series, we detailed the overall 2018 cash flow and spending plans of the 40-plus E&Ps we track. As we said then, instead of investing all their cash flow into oil and gas producing assets, the E&Ps in our study group are curbing capital spending growth and instead dedicating most of their incremental cash flow to (1) reducing their $184 billion in debt outstanding at the end of 2017 and (2) rewarding shareholders. We pegged their incremental capital spending in 2018 at $2.3 billion, leaving over $22 billion in incremental free cash flow. As you’d expect, the 17 Oil-Weighted companies we follow have been the main beneficiaries of $60+/bbl oil prices, raking in 55% of the total increase in cash flow. However, these producers as a group were boosting capital investment by only $2.1 billion, less than one-sixth of their additional cash flow, leaving $11.5 billion in free cash flow to strengthen their balance sheets and boost their equity valuations. For Diversified E&Ps (with a balanced mix of crude and gas assets), a massive portfolio realignment that included $36 billion in asset sales resulted in 4% and 5% production contractions in 2015 and 2016, respectively, which limited cash flow regeneration. Although higher oil prices are expected to generate $7.3 billion in increased 2018 cash flow for Diversified producers in 2018, they are budgeting only a 5% increase in capital spending and allocating the vast majority of their $6.1 billion in free cash flow to share buybacks and dividend increases. Gas-Weighted producers engineered the strongest return to profitability of the three groups and were still continuing to grow production despite lackluster gas prices. Today, we drill down into the factors driving present and future profitability.
Oil prices danced around the $100/bbl level for the first eight months of 2014 before plunging to about $50/bbl by the end of that fateful year. Still, the 44 U.S. E&Ps we track reported a healthy $57 billion in pre-tax operating profit in 2014, or $14.29 per barrel of oil equivalent (boe). The bottom fell out in 2015, though, when oil prices continued to tumble, finishing the year at the mid-$30/bbl level. Our universe of Oil-Weighted, Diversified and Gas-Weighted companies reported a $131 billion pre-tax operating loss in 2015, driven largely by $122 billion in price-related oil and gas asset write-downs and realized prices that were almost half what they were in 2014. That was followed by $31 billion in additional losses in 2016 as realized prices fell another 20% to $21.85/boe. In 2017, those same E&Ps climbed out of the hole, reporting $1.6 billion in total pre-tax operating profits. Thirty-seven companies vaulted into the black in 2017, compared with just four reporting pre-tax operating profits in 2016. Our 44 E&Ps generated more than $81 billion in pre-tax operating cash flow in 2017, a 66% increase from the $49 billion they posted in 2016. Oil prices have risen significantly to well over $60/bbl so far in 2018, but E&Ps have not let down their guard — their operational and cost discipline continues. We estimate that cash flows for these companies will increase another $30 billion, or 37%, in 2018, to $111 billion.