Down Bound Train - Lower Prices Dampen Oil-Weighted Profitability in Second Quarter of 2017

After posting a whopping $160 billion in losses in 2015-16, the 43 exploration and production companies (E&Ps) whose financial performance we’ve been closely tracking roared back to profitability in the first quarter of 2017 on higher commodity prices and cost savings from drilling efficiencies on high-graded portfolios. However, lower oil prices slowed the earnings train in the second quarter, as total adjusted pre-tax operating profit dropped 11.6% to $8.0 billion. Understandably, the 21 oil-focused producers in our universe suffered the biggest impact from depressed crude realizations, reporting a 29% decline in operating profits to just $1.9 billion. The good news is that oil peer group earnings remained solidly in the black, increasing the odds that 2017 will be their first profitable year since 2014. Today, we analyze the results for the individual companies in our Oil-Weighted Peer Group.

Monitoring the financial results of a large and diverse group of E&Ps over the long term is a good way to assess the health of the energy industry as a whole. In Piranha!, our market study of 43 top U.S.-based E&Ps, we examined the strategies that E&Ps are adopting to thrive in a $50/bbl world. Of that universe of companies, 21 focus on oil (60%+ liquids reserves), nine are gas-weighted producers (60%+ natural gas reserves) and 13 are diversified producers. In four recent blogs, we reviewed in detail the changes in forecasted capital spending and production reported by our universe in their mid-year results announcements. We began our analysis of second-quarter profitability in Roller Coaster with a big-picture look. Today, we move on to analyze the profitability of the 21 Oil-Weighted E&Ps compared with their reported first quarter 2017 results.

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The prospects for Oil-Weighted E&Ps are ultimately linked to the swings of the crude oil market. Oil prices started 2017 at over $50/bbl, with the price for oil benchmark West Texas Intermediate (WTI) averaging $52.50/bbl in January and $53.47/bbl in February. However, the price dipped below $50/bbl in March and reached a low for the year at $45.18/bbl in June. The $6.10/bbl decline in the average second quarter oil price resulted in lower pre-tax profits for E&Ps that produce primarily oil.

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