Getting Better - E&Ps' Third-Quarter Results Seen Rebounding After a Memorable, Brutal Spring

No one in North America’s energy sector is likely to forget the second quarter of 2020 anytime soon. In those months — April, May, and June — the demand-destruction effects of the COVID-19 pandemic took root; the price of West Texas Intermediate (WTI) bottomed out, even going negative for a day; and crude oil-focused drillers in particular shut in vast numbers of wells. In late July and August, when exploration and production companies (E&Ps) announced their results for that train wreck of a quarter, it came as no surprise that the write-downs and losses were generally immense and, in many cases, record-shattering. But WTI prices have rebounded somewhat the past couple of months, as has production, suggesting that while E&Ps third-quarter results will be far from stellar, they’ll at least show an improvement and hopefully set the stage for further gains going forward. Today, we break down second-quarter results by producer peer group and discuss the positive trends that portend improved results for the third quarter.

To set the stage, let’s review those horrible second-quarter 2020 results. WTI oil prices fell 40% in the second quarter to an average of $28.17/bbl, from $46.60/bbl in the first quarter of 2020. Even that doesn’t fully reflect the extent of the misery; the 41 major U.S. producers we track realized just $13.89 for every barrel of oil equivalent (boe) they produced in the second quarter, nearly 50% below the previous quarter and the lowest realization in more than a decade. As shown in Figure 1, the E&Ps we follow reported a combined $23.8 billion in pre-tax operating losses in the second quarter (blue bar to far right, measured on the left axis), with $18 billion of that from largely price-related impairments of the value of oil and gas reserves. First-half 2020 losses for the companies totaled $83 billion after a combined $59 billion loss in the first quarter. (As a result of massive reserve write-downs, first-quarter losses dwarfed even those seen in the second quarter. We blogged about it at the time in Spring Breakdown.) Second-quarter cash flow for the group was a scant $5.9 billion (orange bar to far right), down 70% from $19.1 billion in the previous quarter and 79% lower than the $27 billion in the year-ago period.

Oil and gas production fell 9% in the second quarter of 2020 to 1.09 billion boe (right end of gray line; right axis) due to a 14% decline in oil output. While NGL production from Oil-Weighted and Diversified E&Ps was down, total NGL production was only 5% lower because those decreases were partially offset by a 3% increase in NGL output from the Gas-Weighted E&Ps. Natural gas production fell 6% to 3 Tcf (500 MMboe). Only seven companies in our universe of 41 E&Ps increased oil and gas output during the second quarter. Three of the companies — Cabot Oil & Gas, Natural Fuel Gas, and HighPoint Resources — were in the black in the quarter. In contrast, a year earlier, the group earned $10.5 billion, with only two companies reporting losses. Two of the E&Ps we track — Chesapeake Energy and Whiting Petroleum — sought bankruptcy protection in the second quarter, while others are in the process of restructuring. Industry-wide E&P Chapter 11 filings soared to 18 from five in the previous quarter. A bleak picture, indeed.

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