With oil prices higher than they’ve been in some time, it’s no surprise that the 44 major U.S. exploration and production companies we track reported — as a group — the highest quarterly profit and cash flow since 2014. Regaining a solid financial footing has been a long, painful struggle for crude oil and natural gas producers, who slipped into a river of red ink after the crude oil price collapse in late 2014 and 2015. After implementing a dramatic strategic and operational transformation, the industry returned to the black in 2017 despite a mid-year oil price dip, generally weak gas prices, and lingering write-downs from massive portfolio shifts. Now, strengthening oil prices and continued operational and financial discipline have lifted our E&Ps well above breakeven and suggest a higher trajectory for the remainder of the year. Today, we dive into first-quarter 2018 financial reporting by leading E&Ps to identify the drivers of a remarkable recovery.
First, let’s take a look at how the oil and gas industry got here. In our two-part Better blog series, we provided a detailed analysis of the 2017 results of our universe of 44 E&P companies — results that reflected the impact of an industry transformation that included the high-grading of portfolios, intense capital discipline and a focus on operational efficiencies. The E&Ps we track barely returned to profitability in 2017 at realized prices that were 40% below 2014, the last year the group posted a profit. These producers realized $30.10/boe (barrel of oil equivalent, using the rule of thumb that one barrel of oil is equivalent to 6 Mcf of gas in energy content or Btus) in revenues during 2017, while earning $1.6 billion ($0.39/boe). Two years’ worth of cost-cutting efforts began to bear fruit, as lifting costs declined 35% between 2014 and 2017 and DD&A (depreciation, depletion and amortization) charges were slashed by 20%. The only expense that increased between 2014 and 2017 was impairment charges, largely from divestment-related write-downs by a handful of companies that were revamping their portfolios. Our group of E&Ps generated over $81 billion in pre-tax operating cash flow in 2017, a 66% increase from $48.8 billion in 2016.
The higher cash flows triggered widespread concerns that the industry would return to its historical pattern of financial profligacy in the emergence from down cycles over the previous three decades. However, in our four-part Wind of Change blog series, we detailed the remarkable capital discipline reflected in the 2018 cash flow and capital spending plans of the 44 E&Ps we track. Instead of investing all their cash flow in oil and gas producing assets, producers curbed their capital spending growth and dedicated most of their incremental cash flow to (1) reducing their $184 billion in debt outstanding at the end of 2017 and (2) rewarding shareholders. Despite an estimated $25 billion in incremental cash flow, the E&Ps budgeted only a modest $2.3 billion — or 4% — increase in capital expenditures to $63.5 billion, only half of the level spent in 2014. Even with the moderate increase in capital outlays, oil and gas production is expected to grow 6% in 2018.