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Surprise, Surprise, Part 2 - E&P Transformations Drive Strong '18 Results and '19 Outlook

Wednesday’s blockbuster announcement that Occidental Petroleum is challenging Chevron’s definitive agreement to acquire Anadarko Petroleum with a considerably higher offer sent another shock wave across what had been mostly somnolent energy M&A and equity markets. Oxy’s $76/share bid — $11/share more than Chevron’s — valued Anadarko at a whopping 65% premium to its closing price the day before Chevron’s deal to acquire the company was unveiled on April 12. The prospective Oxy/Chevron bidding war provided some of the strongest evidence yet that investors overreacted to the fourth-quarter decline in oil prices when they drove down E&P stock prices by some 40%, as measured by the S&P’s E&P Stock Index. Why the lack of market love? Many U.S. E&Ps are doing very well, actually. In today’s blog, Nick Cacchione identifies and discusses the outstanding performers among the 44 U.S. E&Ps we track, and considers the factors that could drive profit improvement in 2019.

In Part 1 of this two-part series, we examined the 2018 performance of a representative group of U.S. exploration and production companies (E&Ps), who have found it very difficult to shake the aura of doom and gloom that followed the industry after the 2014-15 oil price crash brought many to the brink of insolvency. The plunge in commodity prices in late 2014 did have a dramatic impact — the universe of 44 E&Ps we follow went from $57 billion in pre-tax operating profit in 2014 to $128 billion in losses in 2015 and $30 billion in losses the year after that (orange bars on right axis in Figure 1). Understandably, the stock market reacted, with the S&P Oil and Gas E&P Stock Index (SPSIOP; blue line on left axis in Figure 1) plunging from a high of more than 12,000 in mid-2014 to as low as 3,600 in early 2016. The industry clawed its way back to profitability (albeit by a slim margin) in 2017, though. This performance — and rising oil prices — triggered a recovery in the SPSIOP to about 6,600 in September 2018. However, the steep, and short-lived decline in oil prices to $45/bbl in the fourth quarter of last year resulted in a dramatic 40% decline in the index to less than 4,000 in mid-December 2018. (It’s since recovered to about 5,000, but still, what gives?)

The 2018 E&P earnings results belied all that negative sentiment. Despite the fourth-quarter oil price decline, the industry roared back to profitability last year (gray bar segment to far right using the right axis in Figure 1), netting a healthy pre-tax operating profit of $11.03 per barrel of oil equivalent (boe) in 2018 compared with a barely breakeven $0.07/boe in 2017. More tellingly, the industry has streamlined its cost structure so dramatically that overall 2018 profits were just 20% below those generated in the $100+/bbl environment in 2014. And with first-quarter 2019 oil prices rising 30% — the largest quarterly rise since 2009 — the industry appears to be on track for solid profitability again in 2019. Today, we highlight the outstanding performers — and under-performers — in the Oil-Weighted, Diversified, and Gas-Weighted peer groups and provide a look ahead to prospective 2019 results. Note that in our discussion we will make occasional comparisons to results in 2014, when oil prices (on average) were considerably higher than they were in 2018.

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