Until the fall in crude oil prices over the past few days, U.S. oil and gas producers had been basking in the glow of the highest oil prices in years. Not surprisingly, in the first quarter of 2018 the 44 major U.S. exploration and production companies we track reported the highest quarterly profit and cash flow since the 2014-15 oil market crash brought many to the edge of a financial abyss. These producers put themselves into a position to benefit from the commodity price recovery by implementing dramatic strategic shifts and an operational transformation that emphasized operating efficiency, portfolio high-grading and financial discipline. Now, with oil prices softening somewhat, the prospects for continued profitability growth for the E&P sector as a whole are mixed. Today, we do a deep dive into the results and outlook for the companies in the Oil-Weighted, Diversified, and Gas-Weighted peer groups.
In Part 1 of this blog series, we explained that the pre-tax operating profits of the 44 E&P companies we cover doubled to $10.31 per barrel of oil equivalent (boe), or $10.6 billion, in the first quarter of 2018 from $5.5 billion ($5.55/boe) in the same period last year. All but one of the companies in our universe were profitable in 2018’s first quarter. The strongest crude oil prices since the fourth quarter of 2014 drove revenues to nearly $37 billion, or $35.87/boe — $4.10/boe higher than in first-quarter 2017. At the same time, producers maintained firm control on costs. Lifting costs were slightly higher at $11.07/boe (compared with $10.78/boe in the first quarter of 2017), primarily because of higher price-related severance and ad valorem taxes. DD&A (depreciation, depletion and amortization) charges continued a multi-year decline, falling by 7.5% to $11.02/boe. Exploration expenses were also slashed — to $693 million in first-quarter 2018 from $2.1 billion in the same period a year earlier. Impairment charges rose slightly to $2.8 billion, primarily because EQT Resources took $2.4 billion in write-downs after the closing of its $8.8 billion acquisition of Rice Energy. Cash flow amounted to $25.4 billion ($24.72/boe), up 23% from the $20.7 billion ($20.88/boe) posted in the first three months of last year.
It’s not surprising that the higher oil prices resulted in the Oil-Weighted Peer Group posting the largest profit of our three peer groups in the first quarter of 2018, earning $5.7 billion (blue rectangle in Figure 1) or $18.50/boe, with every company in the black. Cash flow grew to $10.6 billion (yellow rectangle), equal to $34.42/boe — 15% better than a year ago. The Diversified E&Ps earned $5.1 billion (red rectangle in Figure 2) in the first quarter and generated nearly $11 billion in cash flow. The Gas-Weighted E&Ps posted a first-quarter net loss of $248 million, or $0.82/boe, but that result was skewed by the $2.0 billion loss by EQT Resources, which stemmed from its $2.4 billion impairment charge. Excluding the impairments, the gas-focused peer group would have earned $2.2 billion, 22% higher than the $1.8 billion earned in the first three months of 2017.