The third quarter of 2018 was a moment in the sun for U.S. exploration and production companies. The 44 major companies we track reported a 35% increase in pre-tax operating income over the previous quarter and seven-fold increase from the year-ago period on rising commodity prices and narrowing differentials in some key regions. Oil-Weighted producers outside the infrastructure-constricted Permian posted generally higher realizations, and a number of Permian-focused E&Ps minimized the impact of takeaway constraints by employing basis hedges, utilizing firm transportation contracts and reducing their operating costs. Diversified producers saw higher quarterly per-unit profits thanks to the tilt of their portfolios toward oil. And as lower Appalachian differentials lifted the realizations of Gas-Weighted producers, portfolio readjustments and the liquids content of production also positively impacted their profitability and cash flow. Today, we analyze third-quarter results by peer group, and discuss the potential impacts of the sudden plunge in oil prices this fall.
How We Got Here
This is the latest in a number of blogs we’ve written on the financial results of a representative group of 44 U.S. E&Ps — and on what these results reveal about the energy production sector’s health and direction. In our Better blog series, we explored how, after posting $160 billion in pre-tax operating losses in 2015-16, oil and gas producers implemented a strategic and operational transformation to pull themselves out of the red in 2017 and put themselves in position to benefit from rising commodity prices in 2018. Then, in our I Feel Good blog series, we explained how the E&Ps we track cashed in on higher realizations in the first quarter of 2018, reporting the highest pre-tax net operating profits and cash flows since 2014. However, second quarter 2018 profits were flat at $10.7 billion. The analysis in our Big Machine blog series showed that revenues fell 2% to $34.39/boe compared with the first quarter despite NYMEX and Cushing oil prices increasing by about $5/bbl. The primary driver was an upsurge in the Midland, TX, to Cushing, OK, oil price basis differential from $0.40/bbl in the first quarter to more than $8/bbl in the second quarter because of infrastructure constraints. And then, in the initial installment of the two-part series we conclude today, we said that while E&P profits surged 35% in the third quarter to $14.7 billion, the plunge in fourth-quarter oil prices is raising concerns about a reversal in fortune as 2018 draws to a close. Now we consider the results for each of the three peer groups and a few noteworthy company results within each group.
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.
Oil-Weighted E&Ps
The 17 Oil-Weighted E&Ps we monitor posted pre-tax operating profits totaling $6.5 billion (blue rectangle in Figure 1) during the third quarter of 2018, 23% higher than the second quarter and a sharp reversal from the $379 million loss they posted in 2017’s third quarter. Cash flow was $12.4 billion (red rectangle), more than $3 billion higher than the second quarter and 35% better than the $9.2 billion in the year-ago third quarter. The gains in cash flow and profits were primarily driven by stronger oil prices, which pushed oil and gas price realizations ahead by $3.31 per barrel of oil equivalent (boe) in the third quarter over the prior quarter and $13.73/boe over a year ago to $48.40/boe (yellow rectangle). Permian basis differentials were somewhat of a drag on realizations for the peer group as a whole, but were largely mitigated by firm transportation contracts and basis hedges, as evidenced by the fact that only two companies, Diamondback Energy and Parsley Energy, reported substantial declines in per-unit revenues. While oil prices were on the rebound, expenses remained well in check as total costs increased only $0.21/boe to $29.70/boe compared with the second quarter of 2018. Cash costs (lifting costs plus other expenses) were up $0.85/boe to $12.75/boe over the same time period.
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About the song
“Here Comes the Rain Again” was written by Annie Lennox and Dave Stewart. It appears as the first song on side one of the Eurythmics’ third studio album, Touch. Released as a single in January 1984, it went to #4 on the Billboard Hot 100 Singles chart. Personnel on the record were: Annie Lennox (vocals, keyboards), Dave Stewart (guitar, keyboards), the British Philharmonic Orchestra, and Michael Kamen (string arranger and conductor).
Touch was recorded in 1983 at The Church studio in London and produced by Dave Stewart. Released in November 1983, it went to #7 on the Billboard 200 Albums chart and has been certified Platinum by the Recording Industry Association of America. Three singles were released from the LP.
Eurythmics was a British pop duo formed in London in 1980 by Annie Lennox and Dave Stewart. Both had previously been in the British punk band, The Catch, and the British pop band, The Tourists. They achieved international success with the Eurythmics’ single, “Sweet Dreams (Are Made of This),” which went to #1 on the Billboard Hot 100 Singles chart and was certified Gold by the RIAA in 1983. They released eight studio albums, a soundtrack album, a live album, two compilation albums, an EP, and 33 singles. They sold more than 75 million records worldwide. They have won a Brit Award, a Grammy Award, an MTV Video Music Award, and were inducted into the Songwriters Hall of Fame in 2020 and the Rock and Roll Hall of Fame in 2022. The group unofficially broke up in 1990 but has had a few reunions since then. Lennox has a successful solo career, and Dave Stewart is a highly regarded record producer. In March, Lennox played her first live performance in over six years at the Royal Albert Hall in London. Stewart will be embarking on a European summer tour with Eurythmics, featuring Vanessa Amorosi on vocals, beginning in July.
