RBN analysis of 31 exploration and production (E&P) companies shows sharp differences between two groups of gas-weighted firms. The US diversified group is struggling to increase production, and slashing capital spending in light of weak profitability. Meanwhile, the Appalachian group is flying high as the most profitable classification in our analysis – largely as a result of slashing costs in response to weak natural gas prices. Today we wrap up our three-part analysis of U.S. E&P company’s 2015 outlook.
Episode 1 we provided an overview of capital spending, production and profitability trends for a group of 31 companies. The data is sourced from company SEC reports and press releases. The benchmark used to measure profitability is the recycle ratio – meaning production revenue less lifting costs divided by finding and development costs. We segregated the companies into four peer groups: Small/Mid-Size E&Ps, Large Oil Weighted E&Ps, Diversified US Gas Weighted E&Ps and Appalachian Gas Weighted producers. In Episode 2, we took a deeper dive into the two oil weighted peer groups. We saw that while crude prices were in the $90/bbl + range over the past few years these oil weighted companies were only modestly profitable. Consequently, in 2015, they needed to make the most strident cuts in capital spending to adjust to the new oil price environment. In this episode, we now focus in on the Gas Weighted E&Ps. We split the group into the Diversified US Gas Weighted E&Ps and the Appalachian Gas Weighted E&Ps.
Diversified US Gas Weighted E&Ps
The nine companies in our diversified US gas weighted producer group (see Table 1) have a natural gas focus outside of Appalachia. Most of these companies have a significant oil/liquids exposure but to fall into the gas category they have oil weighting of less than 50%. As a group they are expected to cut their organic capital spending by one-third, while keeping their production flat in 2015. Those companies with a heavy oil/liquids exposure are faced with a double head wind, battling a weak price environment for oil and natural gas liquids (NGL) prices as well as for natural gas. This group had the worst profitability of the four in our analysis, as measured by the recycle ratio, due to the combination of a weak revenue stream and an uncompetitive cost structure.