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Rollin' on the River - E&Ps Ride Strong Commodity Price Wave to Record Income and Cash Flow

The oil and gas industry has historically been roiled by global economic and political crises, from the oil embargo in 1973 to the Great Recession of 2008 to the onset of the global pandemic in early 2020.  However, amid the economic and political turmoil from the war in the Ukraine, rampant inflation and supply chain disruptions, E&P companies in recent weeks reported strong results for the first quarter of 2022, riding the wave of rising commodity prices as record volumes of cash flowed into corporate coffers. Producers successfully absorbed service cost increases and resisted calls to abandon their profits-focused fiscal discipline to generate Q1 2022 pre-tax operating earnings and cash flows that were up 25% and 12%, respectively, from the two-decade-high results recorded in the last quarter of 2021. In today’s RBN blog, we detail the industry’s outstanding results and preview its performance for the rest of the year.

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First, let’s briefly review E&Ps’ remarkable rebound in 2021 from heavy pandemic-induced losses in 2020. As we outlined in Nothing’s Gonna Stop Us Now, rising oil and natural gas demand fueled a whopping $152 billion turnaround in results, as the 43 major publicly traded producers we track recorded $86 billion in pre-tax income in 2021 (for perspective, that's just a few billion dollars less than Berkshire Hathaway's 2021 net income) after incurring a net loss of $66 billion in 2020. Not only that, but the industry’s intense focus on controlling costs and maximizing margins made 2021 the most profitable year in at least the last two decades for E&Ps. In fact, they reported income that was two-thirds higher than the previous peak in 2014, when commodity prices were significantly higher. Prices continued to rise in 2022, which led to our prediction of record financial results.

That prediction came true, as the 43 E&Ps reported a record $39.6 billion in pre-tax operating income and $51.3 billion in cash flow in Q1 2022, nearly triple the earnings and double the cash flow in Q1 2021. On a per-unit basis, E&P earnings and cash flow, as shown in Figure 1, reached $32.23/barrel of oil equivalent, or boe (blue bar to far right), and $41.75/boe (orange bar to far right), respectively, in Q1 2022, exceeding the record highs of $25.91/boe and $37.14/boe in the previous quarter. The surge in oil prices is the primary reason for the increase in income as realized prices (gray line in Figure 1) have grown by over $20/boe since Q1 2021 to $53.66/boe.

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