It may seem like a strange turn of phrase, but the best way to describe the E&P sector’s recent round of quarterly earnings calls is a celebration of remarkable climate change. Buffeted and nearly swamped over the past few years by price volatility, investor revolt, regulatory restrictions, and a global pandemic, oil and gas producers finally have the opportunity to bask amid robust returns in an increasingly sunny economic environment. E&Ps are enjoying higher profits and massive free cash flow, raising their dividends, and looking forward to 2022 with renewed optimism. In today’s RBN blog, we outline the dramatic recovery of E&Ps since mid-2020, examine the surge in third-quarter results, and look ahead to the next round of earnings calls this winter.
Given the recent results, it’s hard to remember how gloomy the outlook seemed for oil and gas producers just 18 months ago. We documented the threat to survival from low prices and a high-cost structure in our April 2020 blog Eve of Destruction and analyzed the tsunami of impairment charges and a looming cash flow crisis in Spring Breakdown three months later. In those dark times, the best prospects seemed to be a long, slow, U-shaped recovery spanning two years. Remarkably, as shown in Figure 1, a faster-than-expected rebound in the economy and rising commodity prices triggered a V-shaped recovery for E&P profits. Per-unit profits for the 37 E&P companies we monitor soared from second-quarter 2020 lows to a three-year high by the first quarter of 2021. Buoyed by higher oil and gas prices, producers, as a group, in the third quarter of 2021 (dashed red circle) posted profits nearly double the level in the first quarter of 2019 (dashed black circle) and cash flows were 33% higher. Both measures significantly exceeded the 24% increase in realizations over the first quarter of 2019, a reflection of the new financial and operating cost discipline embraced by E&P managements.
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