Coming Out of the Dark - Clouds on E&Ps' Horizon Dissipate as Industry Fortunes Brighten

Just one year ago, the onset of the COVID-19 pandemic plunged the energy industry’s exploration and production (E&P) sector — already reeling from a steep decline in oil prices in late 2019 — into a memorably brutal spring that threatened its survival. Demand cratered, price realizations fell to the lowest point in a decade, and cash flows dried up. Sure enough, E&P results for the first half of 2020 were a train wreck, with the three-dozen companies we track reporting a whopping $45 billion in losses, including impairments. But the dark clouds hovering over the industry began to clear in the second half of the year as the combination of production cutbacks and recovering demand triggered rising prices.  With the massive price-related impairments largely in the rear-view mirror, year-end 2020 results revealed that most E&Ps had clawed their way back to near-profitability. Today, we review their latest numbers and preview what we expect will be a sunny 2021 for the industry.

As we said in our Getting Better blog last summer, no one in North America’s energy industry is likely to forget the second quarter of 2020 anytime soon. In those months — April, May, and June — the demand-destruction effects of COVID-19 took root; the price of West Texas Intermediate (WTI) bottomed out, even going negative for a day; and crude oil-focused drillers in particular shut in vast numbers of wells (see Shut Down). By late July and August, when E&Ps announced their results for the second quarter, it came as no surprise that the write-downs and losses were generally immense and, in many cases, record-shattering. But WTI prices rebounded — so did production — and third-quarter results announced in late October and November were much better, a topic we discussed in depth in Shake It Out.

The situation for the E&P sector improved further in the fourth quarter of 2020 — and, it seems, in the first three months of 2021. As shown in Figure 1, the 36 E&Ps in our coverage universe reported a fourth quarter 2020 net loss of nearly $2 billion ($2.01 per barrel of oil equivalent, or boe), less than half the $4.2 billion ($4.30/boe) loss in the third quarter and a sea-change from the $45.5 billion in losses in the first half of 2020. Excluding impairments, the E&Ps we monitor generated a net operating profit of $2.45 billion in the fourth quarter, double the comparable $1.22 billion in the third quarter. They generated $13.8 billion ($14.16/boe) in cash flow, 18% higher than the previous quarter and almost triple the $5 billion reported in the second quarter of last year. Part of the improvement was driven by higher realized prices, as our universe of companies garnered $23.54 per boe produced in the final quarter of 2020, up 13% from the third quarter, 67% higher than the April-June period, and just short of the $25.53/boe in the mostly pre-pandemic first quarter. Impairment charges declined to $4.5 billion ($4.53/boe) from $5.4 billion in the third quarter and the staggering $44 billion in the first half of 2020. The benefits of higher prices and lower impairment charges was slightly offset by a 7%, or $0.60/boe, increase in lifting costs.

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