The E&Ps have cut Capex to the bone, but as a group they expect oil and gas production in 2015 to increase versus last year. That’s true from an overall perspective, and it is an important indicator of upcoming production trends. But the real revelations come when you dig into the details. In the oily sector, small and mid-size companies are making deeper cuts but are faring much better than the big boys. On the gassy side, E&Ps in Appalachia are knocking it out of the park, while more diversified gassy players are having a much harder time of it. Today we begin a blog series to drill deeper into the company numbers to see why and how these differences happen.
We first looked into this issue back in January 2015 using an analysis of capex and production guidance provided by our friends at U.S Capital Advisors (see Rig Cuts Deep, Output High!). This time we’ve crunched through the numbers based on data compiled from company’s SEC reporting and issued press releases. Our analysis indicates a 37% decline in exploration and development spending in 2015 for a group of 31 exploration and production companies. These very same companies are expecting to increase oil and gas production by 8% this year. The oil and liquids rich gas producers will see the brunt of the spending declines as the crude oil price decline has slashed cash flows, but the very profitable dry gas Appalachian producers will be moving full speed ahead despite low natural gas prices. This initial blog will provide an overview of our analysis, the next edition will review oil weighted E&Ps and the final posting will look at gas weighted companies.
Our analysis examined the capital spending, production and profitability trends among 31 E&Ps that produced an amount equal to about 36% of U.S. crude oil last year. The data used in the study is publicly available; contained in each company’s filings with the Securities and Exchange Commission (SEC) and press releases issued in the latter half of 2014 and in 2015. The capital spending data point we used is exploration and development outlays, which includes only investment that targets the production of oil and gas and excludes capital used for the acquisition of oil and gas reserves and unproved properties. Here we are comparing 2015 guidance with 2014 actuals. To measure historical profitability we are using the “recycle ratio” which puts field profitability (netbacks) in context with finding and development costs. Our profitability analysis looks at the 2012-14 timeframe.
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. Very simply, we assigned the label “oil weighted” to companies with an oil/liquids weighting over 50%, and the “gas weighted” label was given to companies with an oil weighting of less than 50%. Figure 1 shows the composition of the four peer groups.
Join Backstage Pass to Read Full Article
About the song
"Free Fallin'" was written by Tom Petty and Jeff Lynne, and is the opening cut on side one of Tom Petty's first solo album, Full Moon Fever. The song was released as a single in October 1989, and went to #7 on the Billboard Hot 100 Singles chart. Petty and Lynne wrote and recorded the song in two days. It was the first song completed for Full Moon Fever, with the lyrics based loosely on Petty's frequent trips along Ventura Boulevard in the San Fernando Valley area of Los Angeles. Personnel on the record were: Tom Petty (lead vocals, 12-string acoustic guitar), Mike Campbell (electric guitar, 6- and 12-string acoustic guitar), Jeff Lynne (backing vocals, bass) and Phil Jones (drums).
Full Moon Fever was recorded at M.C. Studios, Rumbo Studios, Sunset Sound, Devonshire Studios and Sound City in Los Angeles in 1987-89. Produced by Tom Petty, Jeff Lynne and Mike Campbell, the album was released in April 1989. It went to #3 on the Billboard Top 200 Albums chart, and has been certified 5x Platinum by the Recording Industry Association of America.
Tom Petty was an American singer-songwriter, multi-instrumentalist, record producer and actor. He released 13 studio albums with the Heartbreakers, three solo albums, two Traveling Wilburys albums, two Mudcrutch albums and a total of 68 singles. He has sold more than 80 million records worldwide. As a solo artist, Petty has won one Billboard Music Award, three Grammy Awards and one MTV Video Music Award, as well as a UCLA Gershwin Award, a Billboard Music Century Award and a MusiCares Person of the Year Award. Tom Petty and the Heartbreakers have won two MTV Video Music Awards and have been inducted into the Rock and Roll Music Hall of Fame. Tom Petty died in October 2017 at the age of 66.
Comments
and it must be looked at in conjuction with at least a 5 year value creation result and its proxy IRR to be meaninful
In reply to Recycle in oil and gas vernacular its termed "plowback" by Mike Rachiele
Hello Moneyonomics:
Plow back refers to the amount of cash flow reinvested back into the operations of a company. That wasn't a focus of this analysis, although certainly a worthy topic.
I would agree with you that studying a longer time frame usually makes an analysis more relevant, but we wanted to study the 2012-2014 time frame since oil prices were very robust for most of that time period.
Thanks for writing.
Does that calculation use proved reserves, or P+P? Also, do you include or exclude future capital costs? Thanks!
In reply to Recycle ratio question by Christopher Lloyd
Hi LLoyd:
The reserve data in the recycle ratio calculations is proved reserves. All the reserve data was pulled from the reserve reconcilliations in the company's 10-k. The calculation is historic in nature, so future capital costs were not considered.
Thanks for the questions.
In reply to by Nicholas Cacchione
Nick --
I'm confused what you used reserve data for? Was it just to get a pro rata figure for F&D costs, or was it for something else?
And your reference to just using production-type capex as a metric, was that just intended to apply to just the way you looked at capital spending cutbacks vs. having some applicability to F&D?
Great article (1 and 2) and great series topic. Thanks
In reply to Reserves Question by Glenn Hall
Hi Timeontarget:
Sorry about the late response.
Yes, we used the reserve data to arrive at a F&D metric for each of the companies. And we did that to compute recycle ratio. We used the production data, as well as the recycle ratio, in order to try to put the capex data in some sort of context.
Glad you like parts 1 & 2. Part three is finished and should be put up on the web sometime soon.
Wondering why those 31 companies were picked?
I see the explanation of how they are grouped by oil or gas weighted companies, but not why they were picked as the representatives of those groups.
Also, what measurement was used for Small/Mid-Size E&Ps vs. Large Oil Weighted E&Ps? Where was the line between the two peer groups?
Hi Cdkosmin:
When I continued this analysis from the original one, I wanted to keep many of the same companies so we could keep the comparability to the original analysis. The original analysis was primarily focused on the "Big Three" oil plays , the Bakken, the Eagle Ford and the Permian Basin. As I got more into the analysis, I noticed the difference between the various groups was pretty interesting. So I fleshed out the four different peer groups by adding some extra companies.
The dividing line between the Large E&Ps and the Small/Mid-Sized was 100 MMboe in 2015 production.
Hope this helps.
Would you be willing to share your schedule with calculations on the recycle ratio? Just want to make sure i understand how you came to those figures. Thanks
Sure, the equation is netback per boe divided by finding and development cost per boe.
Netback per boe is defined as revenue-lifting cost divided by production on a boe basis.
Finding & Development cost per boe defined as exploration cost+ development cost +unproved property purchases in the numerator and the denominator is reserves added excluding reserve purchases. Reserves added would be reserves booked via extensions and discoveries, revisions and improved recoveries. All this data is found in a company's 10-k.
Hope this helps.