Monday, 10/23/2017

Despite some hints that U.S. exploration and production companies are slowing some of their drilling in high profile shale basins — including last week’s decline of 15 operating rigs in the Baker Hughes count, our analysis of 43 representative E&Ps suggests that more than half expect their upstream capital spending in 2017 to exceed cash flow — a definite sign of optimism — and one fifth of the E&Ps will outspend cash flow by more than 50%. Is this a case of rose-colored glasses? Blind faith? Or have E&Ps’ post-price-crash efforts to high-grade their portfolios and improve their operational efficiency given them well-deserved confidence that if they don’t “back down” on capex things will turn out well?  Today, we analyze the cash flow versus the capex of 43 U.S. E&Ps and discuss what it all means.

Monday, 10/16/2017

Despite a decline in natural gas prices, the nine gas-focused U.S. E&Ps we’ve been tracking fared better from a financial perspective in the second quarter of 2017 than E&Ps that concentrate on crude oil or have a diversified mix of oil and gas production. All nine companies in the Gas-Weighted Peer Group stayed in the black — no small feat — but with lower commodity prices the peer group’s profits fell 28% from the first quarter to just under $1.4 billion. Will 2017 be the gas group’s first profitable year since 2014? Today, we analyze the results for our gas-focused peer group as a whole and for individual companies within the group.

Tuesday, 10/10/2017

The 13 diversified exploration and production companies we’ve been tracking would have posted second-quarter 2017 pre-tax operating profits of more than $4.8 billion — $1.1 billion more than their profits in the first quarter — if ConocoPhillips, the largest of the 13, hadn’t taken a $6.3 billion write-down in the value of the company’s crude oil and natural gas assets and registered a nearly $2.8 billion second-quarter loss as a result. With an outlier radically skewing the group’s numbers, it’s best to put our baker’s dozen diversified E&Ps into two baskets — one for the 12 that didn’t take any significant impairments and the other for the lone E&P that took a huge one — and analyze each basket separately. Which is what we do in today’s blog.

Monday, 10/02/2017

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.

Tuesday, 09/26/2017

The 43 U.S. exploration and production companies (E&Ps) we’ve been tracking racked up $160 billion in losses in 2015-16, but they turned things around in the first quarter of 2017, posting profits of $9.1 billion, or $9.12 per barrel of oil equivalent (boe), during that three-month period. At first glance, the second quarter might seem like a return to tough times; profits by the group fell more than 80%, to only $1.7 billion, or $1.71/boe. However, when $6.3 billion in impairments by ConocoPhillips ­­­­— most of them tied to $16 billion asset sales and a write-down of the Australia Pacific LNG project — are excluded, second-quarter profits by our universe of Oil-Weighted, Diversified and Gas-Weighted E&Ps totaled $8.0 billion, or $8.02/boe, a decline of only 11.6% from the first three months of 2017. Today, we begin a review of E&P performance and profitability with a big-picture look at key elements of their income statements.

Tuesday, 09/19/2017

An analysis of mid-year 2017 guidance shows that the nine natural gas-focused exploration and production companies we’ve been tracking are still fully committed to the very aggressive exploration and development spending they outlined at the beginning of the year. These Gas-Weighted E&Ps slightly upped their total 2017 capital budgets to $8.87 billion, a whopping 59% boost from their 2016 investment — well above the 44% and 29% increases announced by the Oil-Weighted and Diversified E&P peer groups, respectively. The gas-focused producers also increased their 2017 production guidance by 1% to 1.046 billion barrels of oil equivalent (Bboe), in contrast to the mid-year reductions in 2017 output announced by the other two peer groups. Today, we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on natural gas.

Monday, 09/11/2017

Even with a double-digit percentage decline in crude oil prices since their initial capital spending budgets for 2017 were set, the 13 diversified U.S. exploration and production companies (E&Ps) we’ve been tracking are trimming their spending plans for the year by only $300 million, largely keeping in place $19 billion in drilling and completion investment. The Diversified Peer Group’s apparent confidence flies in the face of eroding investor sentiment as the median enterprise value per barrel of oil equivalent (boe) of reserves has declined 23% since year-end 2016 to $13.72/boe. Today, we review the changes in the outlook for the Diversified Peer Group’s upstream capital spending plans and update their expectations for 2017 oil and natural gas production.

Wednesday, 09/06/2017

Over the last year or so, Plains All American Pipeline — a large, crude oil-focused master limited partnership (MLP) — has twice made significant changes to its corporate structure and distribution process to free capital to fund organic growth, reduce debt, and strengthen distribution coverage. The changes are efforts to fix a problem: As oil prices plunged, PAA’s distribution coverage fell below 100% in 2015 and 2016, forcing the company to add debt and issue equity to raise cash. An initial restructuring that Plains undertook in mid-2016 included eliminating the incentive distribution rights (IDRs) payable to its general partner — the IDRs had been draining $620 million per year. (For more on IDRs, see Changing Horses in Midstream.) The change resulted in a 21% reduction in the distribution to limited partners as PAA set a minimum annual distribution coverage target of 115%. But plunging profits from the company’s Supply & Logistics segment eroded its coverage to 99% in 2017, triggering another comprehensive review of how it calculates its distribution. In late August, Plains announced a 45% reduction in the annual distribution, from $2.20 per unit to $1.20 per unit, and said it would base future distributions only on the results from its fee-based Transportation and Facilities segments. Today we preview our new Spotlight Report on Plains, which provides a detailed analysis of the likely future performance of all three segments of this major midstream MLP.

Monday, 08/28/2017

Hurricane Harvey and major flooding in Houston and other areas may affect energy markets and lead the 21 exploration and production companies in our Oil-Weighted Peer Group to readjust their 2017 investment programs. But in the weeks leading up to the Lone Star State’s most catastrophic weather event in decades, these E&Ps remained committed to their sharply accelerated 2017 capex plans. Their updated guidance issued with first-half 2017 earnings releases reveal a 44% increase in 2017 capital spending over 2016’s level to $26.5 billion, only a 2% reduction from the $27 billion initially budgeted for this year. The peer group also stayed confident in the long-term profitability of the major U.S. resource plays, which are receiving 80% of their 2017 capex, despite investor concern about lower prices that have triggered a 23% decline in the median enterprise value per barrel of oil equivalent for the Oil-Weighted peers since December 2016. Today we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on oil.

Tuesday, 08/22/2017

Despite a 12% decline in crude oil prices from their December 2016 highs, the 43 top U.S. exploration and production companies (E&Ps) we’ve been tracking are largely maintaining their aggressive 2017 drilling and completion capital spending plans, announcing a mere $1.0 billion — or 1.5% — decline in total investment since the plans were unveiled. The industry’s apparent confidence in the long-term profitability of its aggressive development of the major U.S. resource plays is in sharp contrast with eroding investor sentiment that has driven Standard & Poor’s (S&P) E&P Index 29% lower than its late-2016 peak. The companies that announced modest investment reductions — about one-third of our universe of 43 E&Ps — cited cost savings from increased drilling efficiency and divestments as well as the lower short-term price outlook as reasons for the cuts. Today we review the changes in the overall outlook for 2017 upstream capital spending and oil and natural gas production, and take a quick peek into our three peer groups: those that focus on oil, those that focus on gas, and diversified E&Ps.

Thursday, 07/27/2017

When prospective investors look at a company’s U.S. or Canadian regulatory filings, many of them may mistakenly believe they are getting a complete and accurate assessment of the crude oil, natural gas and natural gas liquids (NGLs) that could technically and economically be produced from the acreage the company controls. In fact, the rules governing the tallying of proved reserves are anything but straightforward and often result in a significant underestimation of the hydrocarbon volumes waiting to be produced. That is particularly true when it comes to reserves in shale plays, which many would argue are the most important reserves of all in today’s energy market. Today we begin a blog series that considers the arcane world of corporate reporting of proved hydrocarbon reserves and the importance of understanding the reporting rules.

Wednesday, 07/05/2017

Midstream giant Enterprise Products Partners (EPD) has attracted significant investor interest because of its simplified structure, 51 consecutive quarters of dividend growth and strong coverage — $2.7 billion in retained cash in the past three years. The company, with a market capitalization of $58 billion, has also quietly continued to build out its large integrated midstream network despite the plunge in commodity prices, investing almost $18 billion in organic growth projects and acquisitions in 2014-16. The end result is impressive: Enterprise is now connected to every major U.S. shale basin, every U.S. ethylene cracker and 90% of the refineries east of the Rocky Mountains. As a result, the company is well positioned to benefit from the recovery in oil and gas production, especially in the Permian Basin and Eagle Ford Shale; the surge in hydrocarbon exports; and the rapid growth of the U.S. petrochemical industry. Today we discuss highlights from the second part of our new Spotlight analysis of EPD, which focuses on the company’s Crude Oil Pipelines & Services, Natural Gas Pipelines & Services and Petrochemical & Refined Products Services segments.

Monday, 06/26/2017

After posting huge pretax operating losses in 2015-16, the nine U.S. natural gas-focused exploration and production companies (E&Ps) we’ve been tracking returned to profitability in the first quarter of 2017. This reversal of fortunes in peer group performance was driven mostly due to higher natural gas prices, which ended a massive flow of red ink that had principally resulted from big reserve write-downs. Now, with higher profits and cash flows, these producers are ramping up their 2017 capital budgets and planning for long-term production growth. Today we continue our series on the financial performance of 43 U.S. E&Ps, this time zeroing in on companies whose hydrocarbon reserves are mostly natural gas.

Wednesday, 06/14/2017

Of the 43 major U.S. exploration and production companies we have been tracking, the 13 diversified companies — the ones with a balanced mix of crude oil and natural gas reserves — engineered the most dramatic financial reversal in the first quarter of 2017, generating $4.6 billion, or $11.46 per barrel of oil equivalent (boe), in pretax operating profit after almost $65 billion in pretax losses in 2015-16. These producers, like their oil-weighted and gas-weighted counterparts, benefited from higher prices and sharply lower drilling and completion costs and lease operating costs. The magnitude of the turnaround was driven by exceptional results from giant ConocoPhillips, which generated more than one-third of the total first quarter 2017 pretax operating profits for our 43-company universe and nearly one-quarter of the total cash flow. The remaining 12 diversified companies reported $1.3 billion in first-quarter pretax profit after $54 billion in losses over the past two years. Today we look at how the turnaround efforts of 13 diversified oil-and-gas E&Ps have been paying off.

Thursday, 06/08/2017

After posting significant pretax operating losses in 2015-16, U.S. oil-weighted exploration and production companies returned to profitability in the first quarter of 2017. The 180-degree turnaround in peer group results was driven not only by higher oil prices, but by major strategic and operational shifts. Most of the 21 E&Ps we’ve been tracking responded to the plunge in revenue that started nearly three years ago by optimizing their portfolios, shedding properties with higher breakeven costs to focus on core unconventional plays and implementing operational efficiencies that led to sharply lower drilling and completion costs. Today we discuss how, with higher cash flows and profits, crude oil producers are ramping up their 2017 capital spending to generate long-term production growth.