impairments

Everyone knows the old saw, “Make hay while the sun shines.” Oil and gas producers have historically honored this sentiment by boosting their capital spending when commodity prices were high and cutting back when realizations dipped. Their investment peaked in 2014, when oil prices were hovering over $100 per barrel, plunged with the price crash in 2015-16, recovered with $70 oil in 2018, and crashed again in the ugly early days of the COVID-19 pandemic. The sun is out again in 2021, but E&Ps seem to have tossed out their old mantra in favor of fiscal discipline, setting and maintaining investment at historic lows despite solid oil prices and surging gas futures. In today’s RBN blog, we review mid-year changes to E&P capital budgets and their impact on oil and gas production.

Memories of disasters linger, and it’s likely that no one in the North American energy sector is likely to ever forget the second quarter of 2020. As the COVID-19 pandemic destroyed demand and crude oil prices bottomed out, exploration and production companies (E&Ps) scrambled to shut in wells and slashed spending in the face of an unprecedented plunge in average realizations to less than $14 per barrel of oil equivalent (boe). Not everyone bought into apocalyptic visions of the industry’s future that were circulating widely, but few analysts expected the rapid return to the level of profitability reflected in the recently released second-quarter 2021 results of the 39 major E&Ps we monitor. Rising oil prices and continuing cost control propelled the earnings of the Oil-Weighted and Diversified peer group companies over the results from the last industry performance peak in the third quarter of 2018, when WTI was priced 10% higher. Although the results of Gas-Weighted producers lagged, soaring third-quarter natural gas prices suggest a catch-up in the second half of the year. In today’s blog, we analyze the second-quarter results of our universe of 39 producers and preview third-quarter results.

Just one year ago, the onset of the COVID-19 pandemic plunged the energy industry’s exploration and production (E&P) sector — already reeling from a steep decline in oil prices in late 2019 — into a memorably brutal spring that threatened its survival. Demand cratered, price realizations fell to the lowest point in a decade, and cash flows dried up. Sure enough, E&P results for the first half of 2020 were a train wreck, with the three-dozen companies we track reporting a whopping $45 billion in losses, including impairments. But the dark clouds hovering over the industry began to clear in the second half of the year as the combination of production cutbacks and recovering demand triggered rising prices.  With the massive price-related impairments largely in the rear-view mirror, year-end 2020 results revealed that most E&Ps had clawed their way back to near-profitability. Today, we review their latest numbers and preview what we expect will be a sunny 2021 for the industry.

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.

March’s crude oil price crash hit the E&P sector like a tsunami, shattering capital and operating budgets, upending drilling plans, and eviscerating equity valuations. The initial responses by producers to the price collapse included a flood of capex reductions, corporate belt-tightening, and scattered production shut-ins. But first-quarter earnings reports issued in late April and early May provided the first detailed insight into the financial wreckage the crisis unleashed on U.S. E&Ps. It wasn’t pretty. The plunge in the WTI oil price to $20/bbl at the end of the first quarter triggered a combined $60 billion in impairments of oil and gas reserves across the 41 E&Ps we track, as well as a 16% decline in average revenue per barrel of oil equivalent (boe) from the pre-pandemic fourth quarter of 2019. More trouble may be ahead: the average oil price in the second quarter is on track for a 35% decline from the first quarter, which will dramatically impact the cash flows that allow companies to pay their staff, keep the lights on, and hold creditors at bay. Today, we analyze the first-quarter earnings results of our representative sample of U.S. producers and take a look forward to the potential effect of lower pricing on second-quarter earnings.

The Shale Revolution that unlocked vast, low-cost oil and gas reserves, resulting in soaring production that transformed the U.S. from a major oil and natural gas importer to a rising exporter, was supposed to usher in a “Golden Age” for exploration and production firms (E&Ps). Instead, investors have increasingly abandoned energy equities, sending the S&P E&P stock index to an all-time low. The index closed at 3,272 on August 16, 2019, or about 75% lower than the all-time high of about 12,500 in mid-2014 and 46% lower than a year ago. And the stock prices of three-fourths of the big, publicly traded E&Ps have hit record lows over the last month. This energy-equities bloodbath would seem to indicate that the E&P industry is on the verge of financial meltdown. However, the just-released second-quarter 2019 results from the 44 U.S. E&Ps we track suggest that’s not entirely the case. Lower commodity prices certainly tightened the screws on the bunch, particularly companies that focus on gas production, but oil-weighted companies managed to eke out profit and cash-flow gains. Today, we provide an in-depth analysis of second-quarter earnings for oil-weighted, gas-weighted and diversified producers.

U.S. oil and gas producer share prices got a nice boost in mid-April from the Chevron/Occidental Petroleum bidding war for Anadarko Petroleum, which sold for more than a 40% premium to its price before Chevron’s opening bid. But the optimism was only temporary; the S&P E&P stock index has since retreated 13% to mid-February levels, during a month in which companies released their first quarter 2019 earnings reports. That suggests that, despite a 38% quarter-on-quarter increase in the pre-tax operating profit of the 44 E&Ps we track, investors found nothing in the first quarter results to dispel the generally negative sentiment that has hung like a dark cloud over the oil and gas industry since late 2014. Today, we analyze the first quarter financial performance of our 44 E&Ps and review the outlook for an industry ripe for further consolidation because of depressed equity valuations.

Crude oil and natural gas prices went through a lot of ups and downs in the 2014-18 period, but the general trend was down. The average price of WTI crude topped $100/bbl in the first half of 2014; by year-end 2018 it stood at $45/bbl. Similarly, the NYMEX natural gas price topped $6.00/MMBtu in early 2014 but fell to a low of about $2.50/MMBtu last year and averaged little more than $3.00/MMBtu. The 44 major U.S. E&P companies we track sought to weather this storm of declining prices by drastically repositioning their portfolios and slashing costs to stay competitive in a new, lower price environment. Their efforts appear to have worked: 2018 profits surged in comparison with 2017 results and approached returns recorded in 2014, when commodity prices were much higher. So why are E&P stock prices languishing? Today, we look at the divergence between investor sentiment and the actual financial performance of U.S. E&P companies.

Until the fall in crude oil prices over the past few days, U.S. oil and gas producers had been basking in the glow of the highest oil prices in years. Not surprisingly, in the first quarter of 2018 the 44 major U.S. exploration and production companies we track reported the highest quarterly profit and cash flow since the 2014-15 oil market crash brought many to the edge of a financial abyss. These producers put themselves into a position to benefit from the commodity price recovery by implementing dramatic strategic shifts and an operational transformation that emphasized operating efficiency, portfolio high-grading and financial discipline. Now, with oil prices softening somewhat, the prospects for continued profitability growth for the E&P sector as a whole are mixed. Today, we do a deep dive into the results and outlook for the companies in the Oil-Weighted, Diversified, and Gas-Weighted peer groups. 

With oil prices higher than they’ve been in some time, it’s no surprise that the 44 major U.S. exploration and production companies we track reported — as a group — the highest quarterly profit and cash flow since 2014. Regaining a solid financial footing has been a long, painful struggle for crude oil and natural gas producers, who slipped into a river of red ink after the crude oil price collapse in late 2014 and 2015. After implementing a dramatic strategic and operational transformation, the industry returned to the black in 2017 despite a mid-year oil price dip, generally weak gas prices, and lingering write-downs from massive portfolio shifts. Now, strengthening oil prices and continued operational and financial discipline have lifted our E&Ps well above breakeven and suggest a higher trajectory for the remainder of the year. Today, we dive into first-quarter 2018 financial reporting by leading E&Ps to identify the drivers of a remarkable recovery.