For a couple of years now, Buckeye Partners has been working to advance a controversial plan to reverse the western half of its Laurel refined-products pipeline in Pennsylvania to allow motor gasoline, diesel and jet fuel to flow east from Midwest refineries into the central part of the Keystone State. Some East Coast refineries that have relied on Laurel for 60 years to pipe their refined products as far west as Pittsburgh have been fighting Buckeye’s plan tooth and nail, arguing that it would hurt their businesses and hurt competition in western Pennsylvania gas and diesel markets — and refined-product retailers in the Pittsburgh area agree. Now, after a state administrative law judge’s recommendation that Pennsylvania regulators reject Buckeye’s plan, Buckeye has proposed an alternative: making the western half of the Laurel Pipeline bi-directional, which would allow both eastbound and westbound flows. Today, we consider the latest plan for an important refined-products pipe and how it may affect Mid-Atlantic and Midwest refineries.
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Four years ago this month, crude oil was selling for north of $100/bbl and natural gas prices were more than 50% higher than they are now. But while hydrocarbon prices sagged later in 2014 — and through 2015 and early 2016 — the declines didn’t deal a crippling blow to U.S. exploration and production companies. Instead, most of the upstream industry weathered the crisis remarkably well. Amidst that striking recovery, the 10 gas-focused E&Ps we’ve been tracking have engineered the strongest return to profitability. After $40 billion in pre-tax losses in 2015-16, they reported a collective $5.2 billion in pre-tax operating income in 2017, with all 10 producers in the black, as well as a 150% increase in cash flow over 2016, to $11.7 billion. However, gas prices have languished below $3.00/MMBtu since early February 2018 — their lowest level since mid-2016 — which means that the gas producers don’t have the tailwind that higher oil prices have been providing to their oil-focused and diversified competitors. Today, we conclude our blog series on E&Ps’ 2018 profitability outlook and cash flow allocation with a look at companies that focus on natural gas production.
Defying predictions of widespread bankruptcies and credit defaults, the U.S. exploration and production companies (E&Ps) we track returned to profitability in 2017 through a strategic transformation that featured the “high-grading” of portfolios, impressive capital discipline and an intense focus on operational efficiencies. However, the road to recovery has been longer and more challenging for some companies, particularly a few of the E&Ps in our Diversified Peer Group, whose output and reserves are more balanced between oil and gas. Their portfolio realignments have been the biggest among our three peer groups — collectively they have shed $36 billion in assets and 3.6 billion barrels of oil equivalent (boe) in proved reserves over the last three years. Today, we continue our review of how rebounding oil prices are affecting E&P cash flow, this time focusing on producers with a rough balance of oil and natural gas assets.
Despite widespread predictions that the oil and gas exploration and production sector would drown in an ocean of red ink after the crude oil price crash that started a little over three years ago, E&P companies finally returned to profitability in 2017. Better yet, with oil prices exceeding $60/bbl, margins are expected to increase in 2018, giving the 44 major E&Ps we track $24.5 billion in incremental cash flow. It’s no surprise that the 17 companies in our Oil-Weighted Peer Group are the prime beneficiaries of the higher crude price, garnering $13.6 billion, or 55%, of the incremental cash flow. Today, we continue our review of how rebounding oil prices are affecting E&P cash flow, this time zeroing in on oil-focused producers.
How a company or industry handles adversity is a valuable test of its mettle. But assessing long-term sustainability requires a second test: handling prosperity. Recently released 2017 results of U.S. exploration and production (E&P) companies confirm that the industry not only defied predictions of widespread bankruptcies and credit defaults after the oil price plunge in late 2014, but learned to generate profits in a $50/bbl crude oil price world. And the E&Ps’ 2018 guidance, issued as oil prices appear to have stabilized above $60/bbl, indicate that the industry is sticking with the new financial discipline that drove its recovery, a remarkable departure from the financial profligacy in the emergence from down cycles over the previous three decades. Today, we examine how 44 large U.S. E&Ps are responding to a rebounding oil sector.
While the recently enacted federal tax cuts have been widely viewed as a boon to corporate America, including businesses in the energy sector, a new report by our friends at East Daley Capital finds a major drawback in the law for midstream companies. By slashing the corporate tax rate from 35% to 21% — and by allowing partnerships and “pass-through” entities to take a 20% deduction on their income pre-tax — the new law will increase the return on equity that midstreamers earn on their crude oil, NGL and natural gas pipelines. That may well lead the Federal Energy Regulatory Commission (FERC) to re-set its formula rates for at least some gas pipelines, and also is likely to heighten regulatory scrutiny of the rates charged by the owners of oil and NGL pipelines. Today, we continue our review of East Daley’s new “Dirty Little Secrets” report with a look at the tax law, the higher pipeline ROEs resulting from the tax cuts, and the midstream companies that may be affected most.
The recent rise in crude oil prices to levels not seen since late 2014 certainly has captured everyone’s attention, and generally boosted the financial prospects for U.S. producers and midstreamers alike. But while it’s often said that a rising tide lifts all boats, the fact is that accurately assessing the relative value of — and prospects for — specific midstream energy companies requires a deep, detailed analysis. Where are their assets located? How do they complement each other? Do their contractual obligations help or hinder? Sure, things may be looking up in the midstream sector in a big-picture sense, but that hardly makes every midstream company a winner. Today, we review highlights from a new East Daley Capital report that shines a bright light on 28 U.S. midstream companies.
The U.S. exploration and production (E&P) sector roared out of the starting gate in 2017 with a new optimism that fueled a more than 40% surge in capital investment. First-quarter results were strong, but an ebb in oil prices and some operational headwinds significantly lowered results in subsequent quarters. When final 2017 results are tallied in the next few weeks, the industry is on track to record its first profitable year since 2013 after posting more than $160 billion in losses in the 2014-16 period. The critical question is whether E&Ps are regaining the momentum that could drive a steady increase in profitability in 2018. Today, we analyze the clues contained in third-quarter 2017 results.
EnLink Midstream Partners LP, seeking to offset declining natural gas production in the Barnett Shale — where the master limited partnership (MLP) has extensive midstream holdings — has been implementing a strategic plan focused on acquisitions and expansions in the burgeoning STACK play in central Oklahoma and in the Permian’s Midland and Delaware basins in West Texas. The level of investment the plan requires has prevented increases in the MLP’s distributions to unit holders for nine consecutive quarters, which in turn has left EnLink’s share price languishing at about half of its 2014 high. The MLP has reported promising signs of growth in Oklahoma and the Permian as well as increased utilization of its southern Louisiana infrastructure, which it says could lead to a higher distribution to unit holders in 2018. Today, we preview our Spotlight Report on EnLink, which provides a detailed analysis of the company’s business segments to determine if its strategic plan will indeed generate real growth over the next four years.
As a volatile 2017 nears the finish line, the big question for U.S. exploration and production companies (E&Ps) is whether they will throttle back their capital expenditures in 2018, cruise on at the same pace or step on the accelerator. We won’t have all the answers for a couple of months, but early guidance issued along with third-quarter 2017 earnings results indicates a solid 14% increase in investment by seven oil-weighted and diversified producers. The big story among this handful of announcements is a 22% gain in planned 2018 capex by giant ConocoPhillips, which had been slashing investment since 2014. The company’s $2 billion capex boost includes doubling spending on its North American unconventional portfolio. Preliminary guidance for the natural gas producers, on the other hand, tells a different and less interesting story. Six companies, two-thirds of the nine gas-weighted E&Ps we’ve been tracking, indicate their 2018 investment will be relatively flat with the preceding year. So today, we focus on the 2018 plans of the oil producers and take an in-depth look at the ConocoPhillips budgeting process and the company’s noteworthy investment increase.
At times in the past, exploration and production companies (E&Ps) have been viewed as the riverboat gamblers of U.S. commerce. Given the right market signals, producers have been known to go “all in,” tapping credit markets in the equivalent of pawning grandma’s jewelry to win big by filling an inside straight. And, of course, they’ve sometimes paid the bitter price when commodity markets dealt the inevitable bad hand. So, the obvious question when prices and cash flows dipped earlier this year after producers raised capital investment by an average 40% is whether this is déjà vu all over again. Is the industry once again piling on too much debt? Today, we look at the debt levels of the 43 U.S. E&Ps we’ve been tracking.
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.
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.
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.
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.
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.