Shake It Out - Financial Results, Bankruptcy Filings, and Mergers Separate E&P Winners, Losers

Wafting through the late autumn air in November, along with the sharp scent of burning leaves and the cinnamon-tinged aroma of pumpkin pie, was a moderate whiff of optimism for the energy industry’s long-beleaguered exploration and production sector. Equity prices in general were buoyed by news on the efficacy of the COVID-19 vaccines and the prospects of imminent approval that could finally bring the pandemic under control and improve industry fundamentals. E&P stocks, which also benefited from a rebound in third-quarter earnings, recorded the largest monthly gain in history: a 32% rise in the S&P E&P Index. However, their share prices were still down 69% from the 2019 highs and 45% from end-of-last-year levels as oil and gas producers still face a long road to return to “normal.” Today, we analyze the third-quarter earnings of the 40 major E&P companies we track and review the major impacts on the sector since the onset of the pandemic.

The most significant obvious and important effects of the COVID-19-induced dislocations among the major U.S. E&Ps we monitor are the unprecedented number of corporate bankruptcies and acquisitions. In the first nine months of 2020, six of these companies filed for corporate restructuring under Chapter 11. As we recently discussed in our blog Good Vibrations, another six companies have been or will be acquired, five by other major producers, as top-tier E&Ps combine to achieve economies of scale that enable them to slash operating expenses and increase cash flow. 

As we predicted in our September blog, Getting Better, higher oil prices triggered a rebound in earnings from the brutal second-quarter results. With the average WTI oil price at Cushing rising from $28/bbl in the second quarter to just over $40/bbl in the third, the average realization for the 40 E&Ps we follow increased by 50% to $20.92 per barrel of oil equivalent (boe). As shown in Figure 1, the companies still lost $3.5 billion (blue bar to far right) — or $3.52/boe — in the third quarter of 2020, resulting from $5.3 billion ($4.86/boe) in impairment charges, an improvement from the $23 billion lost in the previous three months. Excluding the write-downs, our universe of E&Ps eked out $1.8 billion ($1.61/boe) in pre-tax profits in the third quarter (orange bar to far right) as their expenses were held largely in check. The 14 Oil-Weighted E&Ps lost just under $1 billion while taking $2.2 billion in impairment charges. Excluding the impairments, the oil-focused firms earned $1.3 billion ($3.89/boe). The 17 Diversified E&Ps, in turn, lost $1.3 billion, including $2.4 billion in impairment charges. Excluding those impairment charges, the Diversified producers earned $1.1 billion and saw $6.8 billion in cash flow. The nine Gas-Weighted E&Ps performed the worst among the three peer groups, losing $1.3 billion ($3.04/boe), including $687 million in impairments, meaning that the gas-focused companies still lost nearly $600 million when impairments are excluded. (We’ll look at each of the three peer groups in more detail in a moment.)

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