Down, But Not Out - E&P Profits, Cash Flow Slip Again, But Cost Controls Keep Industry in the Black

With oil and gas prices drifting lower and markets continuing to pummel exploration and production companies, shareholders and analysts approached the third-quarter 2019 earnings season with the sense of impending doom akin to awaiting the results of an IRS audit. There was a lot of talk that the Shale Revolution was fizzling out and that the industry was approaching yet another financial Armageddon, like the 2014-15 oil price crash crisis. But the results belied the worst fears: while lower commodity prices did reduce profits and cash flows, E&Ps as a group remained solidly profitable in the third quarter, with 40 of the 47 companies we track ending up in the black. The reductions in operating income and cash flows were generally in line with lower realizations from oil and gas sales, although lower commodity prices did trigger some write-downs of properties that could no longer be profitably developed. Once again, E&Ps held the line on costs, continuing the financial discipline that fueled the industry’s recovery after the mid-decade price crash. Although producers generally cut back expenditures in line with lower cash flows, increases in drilling efficiency allowed production to keep growing. Today, we examine the financial health of the 47 E&Ps we track in this analysis and the ways they are navigating the price downturn.

As NPR Marketplace radio host Kai Ryssdal likes to say, “Let’s do the numbers.” E&Ps took a double-barreled hit during the third quarter of 2019, as oil and gas prices fell while impairments rose substantially. The 47 E&Ps we follow reported combined pretax operating profits of $6.1 billion profit, or $5.06 per barrel of oil equivalent (boe; blue bar to far right in Figure 1), the lowest since 2017. Pretax operating cash flow fell just short of $20/boe (orange bar to far right in Figure 1). Profits, excluding impairments, and cash flow declined $2.96 billion and $2.73 billion, respectively, virtually matching the $2.76 billion reduction in revenues from lower commodity prices. Impairments totaled nearly $3 billion, double the previous quarter, led by Antero Resources’ $1 billion write-down of its Utica Shale properties. Lifting costs, DD&A (depreciation, depletion and amortization) expenses, and exploration costs were level with the preceding two quarters.

The Gas-Weighted E&Ps were hit the hardest, posting a $2.77/boe loss in the third quarter as Henry Hub prices fell 7% to $2.33/boe; Appalachian natural gas prices fell at twice that rate. Oil-Weighted E&Ps suffered a 42% decline in pretax operating profits to $7.49/boe, while the Diversified E&Ps were spared the worst impact, with income falling 12% to $8.49/boe. Production continued its growth, increasing 28 MMboe, or 2.3%, to 1.234 billion boe (gray line in Figure 1), including the Occidental Petroleum (Oxy) acquisition of Anadarko Petroleum. Oxy closed on the Anadarko deal on August 8, 2019, and reported only seven weeks of Anadarko activity in its financial statements. Fortunately, Oxy reported the combined companies’ output, which we used to plot production data in Figures 1 and 2.

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