The Shale Revolution that unlocked vast, low-cost oil and gas reserves, resulting in soaring production that transformed the U.S. from a major oil and natural gas importer to a rising exporter, was supposed to usher in a “Golden Age” for exploration and production firms (E&Ps). Instead, investors have increasingly abandoned energy equities, sending the S&P E&P stock index to an all-time low. The index closed at 3,272 on August 16, 2019, or about 75% lower than the all-time high of about 12,500 in mid-2014 and 46% lower than a year ago. And the stock prices of three-fourths of the big, publicly traded E&Ps have hit record lows over the last month. This energy-equities bloodbath would seem to indicate that the E&P industry is on the verge of financial meltdown. However, the just-released second-quarter 2019 results from the 44 U.S. E&Ps we track suggest that’s not entirely the case. Lower commodity prices certainly tightened the screws on the bunch, particularly companies that focus on gas production, but oil-weighted companies managed to eke out profit and cash-flow gains. Today, we provide an in-depth analysis of second-quarter earnings for oil-weighted, gas-weighted and diversified producers.
We noted in Surprise, Surprise earlier this year that U.S. E&P company stocks have been shrouded in an aura of gloom and doom for the past several years, unable to shake the negative sentiment ever since oil prices crashed in 2014-15. The group’s stock performance in recent months suggests that the bleak outlook has only deepened since then as commodity prices remain under pressure. The West Texas Intermediate (WTI) crude oil price peaked in early October 2018 at over $76/bbl, then fell sharply at year-end 2018 to about $45/bbl. Prices rebounded in early 2019, averaging just under $55/bbl in the first quarter and then increasing to about $60/bbl in the second quarter (though they’re currently back down to about $56/bbl). CME/NYMEX natural gas prices, in turn, peaked in November 2018 at nearly $5/MMBtu and, like oil prices, cratered at year-end 2018 to under $3/MMBtu. After a short-lived rebound early in 2019, prices averaged below $3/MMBtu for the first quarter, then drifted lower, averaging $2.50/MMBtu in the second quarter (they’re now down further to about $2.25/MMBtu). Regionally, Permian Basin gas prices were crushed, with trades at Waha Hub averaging negative-$0.05/MMBtu during the second quarter of 2019, which had a significant impact for Permian producers.
E&P earnings and cash flows have moved largely in tandem with commodity prices. But through all this, the sector managed to maintain profitability by significantly lowering costs even as it grew production volumes. U.S. E&Ps in the second quarter of 2019 recorded the sixth consecutive quarter of solid profitability, generating $10.2 billion in pre-tax operating profits and $26.1 billion in operating cash flow. In addition, producers paid $1.8 billion in dividends and spent $3.3 billion on share repurchases to return cash flow to shareholders. All but two of the 44 companies we follow were profitable, and the remaining two that reported net losses did so primarily due to one-time asset impairment charges. Altogether over the last six quarters, the 44 companies reported $68 billion in pre-tax operating profits, a remarkable recovery after $128 billion in losses in 2015-16. Cash flows have totaled $162 billion over that period, far exceeding their $110 billion in capital investment.