Extreme makeovers by exploration and production companies over the past five years have resulted in higher crude oil and natural gas production, lower costs and more money for shareholders in the form of dividends and share buy-backs. Despite all this, investors have continued to abandon the E&P sector, with the S&P E&P index sliding to a series of record lows: down 75% from its 2014 peak, down 51% from a year ago, and down 5% from this time last month. Why the major disconnect? Today, we examine the improving financial health of most of the 48 E&Ps we track in this analysis and the reasons why investors remain wary of E&P equities.
Any investors who’ve held onto E&P shares since the valuation apex in 2014 have been punished by a more than 20% negative annual return over those five years — a period in which the much broader S&P 500 Index generated a healthy 8.75% annualized gain. Similarly, over the last 52 weeks, S&P’s E&P index recorded a staggering 51% loss, while the overall market was up nearly 2%. But as we pointed out in our recent Don’t Stop Believin' blog, the major U.S. oil and gas producers we monitor recorded a sixth consecutive quarter of solid profitability for the three-month period ending June 30, 2019, generating $10.2 billion in pre-tax operating profits and $26.1 billion in operating cash flow. All but two of the companies were profitable, with the remaining two reporting net losses on one-time asset impairment charges. Over the last six quarters, the E&Ps reported $68 billion in pre-tax operating profits, a remarkable recovery after $128 billion in losses in 2015-16. Cash flows over the last six quarters totaled $162 billion, far exceeding the $110 billion in capital investment.
Of course, these are relatively short-term results. Investors may be retreating from energy equities for reasons that include longer-term concerns about the future viability of the U.S. E&P sector. So, in this blog, we will examine five-year trends in key fundamental areas, such as capital costs, operating costs, leverage, and profitability, to see if they justify the current negative sentiment about the energy industry.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
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About the song
“I Can’t Make You Love Me” was written by Mike Reid and Allen Shamblin and is the third track on Bonnie Raitt's 11th studio album, Luck of the Draw. Raitt’s vocal performance on the song was done on the first take. She thought that the feel and authenticity for the sad song wouldn’t be duplicated if they tried for a “perfect” take later. The song was released as the third single from Luck of the Draw in October 1991 and went to #6 on the Billboard Adult Contemporary chart and #18 on the Billboard Hot 100. In November 2016, the song was inducted into the Grammy Hall of Fame.
Luck of the Draw was recorded at Ocean Way Recording, Capitol Studios and Conway Studios in Los Angeles, with Bonnie Raitt and Don Was producing. The LP was released in June 1991 and went to #2 on the Billboard Top 200 Albums chart. Three charting singles were released from the album, and it has been certified 7x Platinum by the Recording Industry Association of America. The album was dedicated to Stevie Ray Vaughan, who had recently died in a helicopter accident following a show in Wisconsin. More than 40 musicians were involved in the recording of the LP, which featured Raitt on lead and backing vocals; electric, slide and acoustic guitars; and electric piano. The second cut from the album, “Good Man, Good Woman,” was a duet with Delbert McClinton, and also appeared on his Never Been Rocked Enough album. The song won a Grammy Award in 1992 for Best Rock Performance by a Duo. Luck of the Draw won a Grammy Award for Best Female Rock Vocal Performance, and the single from the album, “Something to Talk About,” won a Grammy Award for Best Female Pop Vocal Performance in 1991.
Bonnie Raitt is an American blues singer, guitarist and songwriter. She has released 17 studio albums, one live album, three compilation albums and 29 singles. Raitt has won 11 Grammy Awards and one Americana Music Award, and was awarded an Honorary Doctor of Music Degree from Berklee College of Music. She also has received the Harvard Arts Medal and a Lifetime Achievement Award from the National Guitar Museum and was inducted into the Rock and Roll Hall of Fame in 2000. She still records and tours.
Comments
Nick,
I enjoyed your post - it's refreshing to read something positive regarding our industry. That said, I am struggling to see the shareholder returns you speak of here.
Looking at 100+ U.S. E&P's (all market caps) I am only seeing 26 that currently issue any sort of dividend. Of those 26, 16 have < 3.0% yield - not exactly "music to my ears". As for buybacks, only 2 companies (COG & CLR) have announced buybacks in 2019. In 2018, there were only 10 - COG, COP, DVN, GPOR (not a healthy company), HESS, LPI, LLEX (almost BK), NBL, PXD and QEP. Maybe the 48 co's you guys cover are the cream of the crop, but looking at the U.S. E&P sector as a whole, it is not good and the returns just aren't there.
In reply to Shareholder Returns? by Chad Hill
Hi Virgil:
Our point was that more dollars are being allocated toward dividends and share repurchases instead of higher levels of capital spending. Not that E&Ps are high yielding equities. About 20 of the 48 companies we track pay dividends. Those dividends will be about $7 billion this year, compared to $5.9 billion in 2016. Share repurchases were nearly $16 billion in 2018 compared to pretty much zero in 2016 and $10 bllion in 2014 when oil prices were over $90/bbl.
So, in total, our universe of companies sent over $20 billion back to shareholders in 2018 and another $20 billion should be sent to shareholders in 2019. That's on par with 2014, were oil prices as I mentioned earlier were significantly higher.
Very well written article covering various performance parameters of the E&P business and an overview about how the industry have overcome the challenges over the last few years. Quite often, we hear about this industry being a cash burner and a lot of skepticism around its survival in a low price environment. However, this article clearly shows that the industry is well prepared for such an environment if we have one in the future.
In reply to Excellent Snapshot . . by Shailesh Karkera
Thanks for the kind message, SSK.