It’s no surprise that the plunge in crude oil prices between mid-2014 and early 2016 was a five-alarm wake-up call for the 44 exploration and production companies we follow. To deal with the trauma of the crude price collapse — and generally soft natural gas prices to boot — the industry undertook a dramatic strategic and operational transformation that enabled it to climb out of a huge hole and return to profitability in 2017. Key factors driving this impressive turnaround included the high-grading of portfolios, intense capital discipline and a heightened focus on operational efficiencies. However, the trajectory of recovery has varied from company to company because of the pace of their portfolio transformations, their geographic focus and, most significantly, the commodity mix of their production. Today, we look at how specific E&Ps within our three peer groups — Oil-Weighted, Diversified, and Gas-Weighted — have been working their way back to black.
In Part 1 of this two-part series, we noted that our universe of 44 E&P companies went through a major rough patch mid-decade, swinging from $57 billion in pre-tax operating profits in 2014 to $131 billion in losses in 2015. They clawed their way back, though, trimming their losses to $31 billion in 2016 and reporting $1.6 billion in pre-tax operating profits in 2017. Thirty-seven of the 44 companies vaulted into the black in 2017, compared with just four reporting pre-tax operating profits in 2016. They generated more than $81 billion in pre-tax operating cash flow in 2017, compared with the $49 billion they posted in 2016. And while oil prices have risen to near $70/bbl in recent weeks, our E&Ps have not let down their guard. We estimate that cash flows for these companies will increase another $30 billion — or 37% — in 2018, to $111 billion. Now we kick-off our deeper dive into the 44 companies we cover, through the prism of our three peer groups.
Oil-Weighted Peer Group
Figure 1 shows that the Oil-Weighted E&Ps reported a collective loss of just over $1 billion in 2017 because of $8.7 billion in reserve-impairment charges — 77% of which came from Marathon Oil’s write-off from the sale of its Canadian oil sands properties. All but four of the 17 E&Ps in this peer group lost money in 2016, but in 2017, 14 of the Oil-Weighted producers reported profits. Notably, our group of oil-focused companies generated over $30 billion — or $24.42 per barrel of oil equivalent (boe) — in cash flow, up 66% over 2016. The driver was higher oil prices, which increased peer-group revenues by 36% to $36.14/boe, the highest among our three categories of E&Ps. This advantage was offset by lifting costs; depreciation, depletion and amortization (DD&A); impairments; and exploration expenses that were the highest among the three groups. Impairment charges of $7.02/boe were more than three times the $2.17/boe reported by the Oil-Weighted Peer Group in 2016, but when we exclude Marathon Oil, they were only $1.65/boe for the remainder of the peer group.