The third quarter of 2018 was a moment in the sun for U.S. exploration and production companies. The 44 major companies we track reported a 35% increase in pre-tax operating income over the previous quarter and seven-fold increase from the year-ago period on rising commodity prices and narrowing differentials in some key regions. Oil-Weighted producers outside the infrastructure-constricted Permian posted generally higher realizations, and a number of Permian-focused E&Ps minimized the impact of takeaway constraints by employing basis hedges, utilizing firm transportation contracts and reducing their operating costs. Diversified producers saw higher quarterly per-unit profits thanks to the tilt of their portfolios toward oil. And as lower Appalachian differentials lifted the realizations of Gas-Weighted producers, portfolio readjustments and the liquids content of production also positively impacted their profitability and cash flow. Today, we analyze third-quarter results by peer group, and discuss the potential impacts of the sudden plunge in oil prices this fall.
How We Got Here
This is the latest in a number of blogs we’ve written on the financial results of a representative group of 44 U.S. E&Ps — and on what these results reveal about the energy production sector’s health and direction. In our Better blog series, we explored how, after posting $160 billion in pre-tax operating losses in 2015-16, oil and gas producers implemented a strategic and operational transformation to pull themselves out of the red in 2017 and put themselves in position to benefit from rising commodity prices in 2018. Then, in our I Feel Good blog series, we explained how the E&Ps we track cashed in on higher realizations in the first quarter of 2018, reporting the highest pre-tax net operating profits and cash flows since 2014. However, second quarter 2018 profits were flat at $10.7 billion. The analysis in our Big Machine blog series showed that revenues fell 2% to $34.39/boe compared with the first quarter despite NYMEX and Cushing oil prices increasing by about $5/bbl. The primary driver was an upsurge in the Midland, TX, to Cushing, OK, oil price basis differential from $0.40/bbl in the first quarter to more than $8/bbl in the second quarter because of infrastructure constraints. And then, in the initial installment of the two-part series we conclude today, we said that while E&P profits surged 35% in the third quarter to $14.7 billion, the plunge in fourth-quarter oil prices is raising concerns about a reversal in fortune as 2018 draws to a close. Now we consider the results for each of the three peer groups and a few noteworthy company results within each group.
The 17 Oil-Weighted E&Ps we monitor posted pre-tax operating profits totaling $6.5 billion (blue rectangle in Figure 1) during the third quarter of 2018, 23% higher than the second quarter and a sharp reversal from the $379 million loss they posted in 2017’s third quarter. Cash flow was $12.4 billion (red rectangle), more than $3 billion higher than the second quarter and 35% better than the $9.2 billion in the year-ago third quarter. The gains in cash flow and profits were primarily driven by stronger oil prices, which pushed oil and gas price realizations ahead by $3.31 per barrel of oil equivalent (boe) in the third quarter over the prior quarter and $13.73/boe over a year ago to $48.40/boe (yellow rectangle). Permian basis differentials were somewhat of a drag on realizations for the peer group as a whole, but were largely mitigated by firm transportation contracts and basis hedges, as evidenced by the fact that only two companies, Diamondback Energy and Parsley Energy, reported substantial declines in per-unit revenues. While oil prices were on the rebound, expenses remained well in check as total costs increased only $0.21/boe to $29.70/boe compared with the second quarter of 2018. Cash costs (lifting costs plus other expenses) were up $0.85/boe to $12.75/boe over the same time period.