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Wrecking Ball - Plunging Natural Gas Prices Spur Continued Decline in E&P Earnings in Q1 2023

U.S. E&P companies engineered a spectacular recovery from the near financial disaster brought on by the pandemic. They rode a rising tide of commodity prices to generate record profits and cash flows that peaked in mid-2022 when West Texas Intermediate (WTI) crested at $114/bbl in May and natural gas prices breached the $9/MMBtu mark in August. But sustaining that level of return has been an uphill battle against commodity prices that have fallen off significantly from their peak as well as persistent inflation that has burdened the entire economy. In today’s RBN blog, we analyze the impact of this battle on the Q1 2023 results of oil and gas producers and provide an outlook for Q2.

The 42 oil and gas producers we monitor — every publicly held U.S. E&P with a market capitalization over $500 million, but not integrated energy companies like ExxonMobil and Chevron — recorded back-to-back profitable years in 2021 and 2022. As we outlined in Camelot, pre-tax operating profits and cash flow from operations peaked in Q2 2022. Earnings of $52.5 billion exceeded the total amount earned in all of 2014, when oil prices last exceeded $100/bbl and cash flows topped $64 billion. However, as we reported in Downhill Lullaby, oil and gas prices retreated from the mid-2022 highs in the second half of last year and profits dropped 10% in Q3 and 29% in Q4 as cash flows fell 8% and 21%, respectively. Although we predicted an even “less idyllic” Q1 2023, oil prices showed signs of stabilizing, moderating the impact on E&P earnings.

Oil prices fell just 6% to an average of $77.61/bbl in Q1 2023, but natural gas prices fell off a cliff, plunging 57% from $5.62/MMBtu to $2.55/MMBtu. As shown in Figure 1, the 42 companies in our study universe posted Q1 2023 pre-tax earnings of $19.08 per barrel of oil equivalent ($/boe; $25 billion; blue bar to far right) and generated $29.26/boe ($38.4 billion; orange bar to far right) in cash flow during the first three months of this year, down 29% and 21%, respectively, from the $26.70/boe and $37.11/boe they posted the previous quarter. Earnings were 54% lower than the Q2 2022 peak of $41.50/boe while cash flow was 43% below its Q2 2022 peak of $51.04/boe. Per-unit revenues were $41.23/boe (right end of gray line in Figure 1), $8.18/boe (or 17%) lower than the $49.41/boe realized in Q4 2022 and $22.80/boe (or 36%) lower than the peak of $64.03/boe in Q2 2022.

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