The U.S. exploration and production (E&P) sector roared out of the starting gate in 2017 with a new optimism that fueled a more than 40% surge in capital investment. First-quarter results were strong, but an ebb in oil prices and some operational headwinds significantly lowered results in subsequent quarters. When final 2017 results are tallied in the next few weeks, the industry is on track to record its first profitable year since 2013 after posting more than $160 billion in losses in the 2014-16 period. The critical question is whether E&Ps are regaining the momentum that could drive a steady increase in profitability in 2018. Today, we analyze the clues contained in third-quarter 2017 results.
Posts from Nick Cacchione
EnLink Midstream Partners LP, seeking to offset declining natural gas production in the Barnett Shale — where the master limited partnership (MLP) has extensive midstream holdings — has been implementing a strategic plan focused on acquisitions and expansions in the burgeoning STACK play in central Oklahoma and in the Permian’s Midland and Delaware basins in West Texas. The level of investment the plan requires has prevented increases in the MLP’s distributions to unit holders for nine consecutive quarters, which in turn has left EnLink’s share price languishing at about half of its 2014 high. The MLP has reported promising signs of growth in Oklahoma and the Permian as well as increased utilization of its southern Louisiana infrastructure, which it says could lead to a higher distribution to unit holders in 2018. Today, we preview our Spotlight Report on EnLink, which provides a detailed analysis of the company’s business segments to determine if its strategic plan will indeed generate real growth over the next four years.
As a volatile 2017 nears the finish line, the big question for U.S. exploration and production companies (E&Ps) is whether they will throttle back their capital expenditures in 2018, cruise on at the same pace or step on the accelerator. We won’t have all the answers for a couple of months, but early guidance issued along with third-quarter 2017 earnings results indicates a solid 14% increase in investment by seven oil-weighted and diversified producers. The big story among this handful of announcements is a 22% gain in planned 2018 capex by giant ConocoPhillips, which had been slashing investment since 2014. The company’s $2 billion capex boost includes doubling spending on its North American unconventional portfolio. Preliminary guidance for the natural gas producers, on the other hand, tells a different and less interesting story. Six companies, two-thirds of the nine gas-weighted E&Ps we’ve been tracking, indicate their 2018 investment will be relatively flat with the preceding year. So today, we focus on the 2018 plans of the oil producers and take an in-depth look at the ConocoPhillips budgeting process and the company’s noteworthy investment increase.
At times in the past, exploration and production companies (E&Ps) have been viewed as the riverboat gamblers of U.S. commerce. Given the right market signals, producers have been known to go “all in,” tapping credit markets in the equivalent of pawning grandma’s jewelry to win big by filling an inside straight. And, of course, they’ve sometimes paid the bitter price when commodity markets dealt the inevitable bad hand. So, the obvious question when prices and cash flows dipped earlier this year after producers raised capital investment by an average 40% is whether this is déjà vu all over again. Is the industry once again piling on too much debt? Today, we look at the debt levels of the 43 U.S. E&Ps we’ve been tracking.
Despite some hints that U.S. exploration and production companies are slowing some of their drilling in high profile shale basins — including last week’s decline of 15 operating rigs in the Baker Hughes count, our analysis of 43 representative E&Ps suggests that more than half expect their upstream capital spending in 2017 to exceed cash flow — a definite sign of optimism — and one fifth of the E&Ps will outspend cash flow by more than 50%. Is this a case of rose-colored glasses? Blind faith? Or have E&Ps’ post-price-crash efforts to high-grade their portfolios and improve their operational efficiency given them well-deserved confidence that if they don’t “back down” on capex things will turn out well? Today, we analyze the cash flow versus the capex of 43 U.S. E&Ps and discuss what it all means.
The 13 diversified exploration and production companies we’ve been tracking would have posted second-quarter 2017 pre-tax operating profits of more than $4.8 billion — $1.1 billion more than their profits in the first quarter — if ConocoPhillips, the largest of the 13, hadn’t taken a $6.3 billion write-down in the value of the company’s crude oil and natural gas assets and registered a nearly $2.8 billion second-quarter loss as a result. With an outlier radically skewing the group’s numbers, it’s best to put our baker’s dozen diversified E&Ps into two baskets — one for the 12 that didn’t take any significant impairments and the other for the lone E&P that took a huge one — and analyze each basket separately. Which is what we do in today’s blog.
The 43 U.S. exploration and production companies (E&Ps) we’ve been tracking racked up $160 billion in losses in 2015-16, but they turned things around in the first quarter of 2017, posting profits of $9.1 billion, or $9.12 per barrel of oil equivalent (boe), during that three-month period. At first glance, the second quarter might seem like a return to tough times; profits by the group fell more than 80%, to only $1.7 billion, or $1.71/boe. However, when $6.3 billion in impairments by ConocoPhillips — most of them tied to $16 billion asset sales and a write-down of the Australia Pacific LNG project — are excluded, second-quarter profits by our universe of Oil-Weighted, Diversified and Gas-Weighted E&Ps totaled $8.0 billion, or $8.02/boe, a decline of only 11.6% from the first three months of 2017. Today, we begin a review of E&P performance and profitability with a big-picture look at key elements of their income statements.
Even with a double-digit percentage decline in crude oil prices since their initial capital spending budgets for 2017 were set, the 13 diversified U.S. exploration and production companies (E&Ps) we’ve been tracking are trimming their spending plans for the year by only $300 million, largely keeping in place $19 billion in drilling and completion investment. The Diversified Peer Group’s apparent confidence flies in the face of eroding investor sentiment as the median enterprise value per barrel of oil equivalent (boe) of reserves has declined 23% since year-end 2016 to $13.72/boe. Today, we review the changes in the outlook for the Diversified Peer Group’s upstream capital spending plans and update their expectations for 2017 oil and natural gas production.
Despite a 12% decline in crude oil prices from their December 2016 highs, the 43 top U.S. exploration and production companies (E&Ps) we’ve been tracking are largely maintaining their aggressive 2017 drilling and completion capital spending plans, announcing a mere $1.0 billion — or 1.5% — decline in total investment since the plans were unveiled. The industry’s apparent confidence in the long-term profitability of its aggressive development of the major U.S. resource plays is in sharp contrast with eroding investor sentiment that has driven Standard & Poor’s (S&P) E&P Index 29% lower than its late-2016 peak. The companies that announced modest investment reductions — about one-third of our universe of 43 E&Ps — cited cost savings from increased drilling efficiency and divestments as well as the lower short-term price outlook as reasons for the cuts. Today we review the changes in the overall outlook for 2017 upstream capital spending and oil and natural gas production, and take a quick peek into our three peer groups: those that focus on oil, those that focus on gas, and diversified E&Ps.
After posting huge pretax operating losses in 2015-16, the nine U.S. natural gas-focused exploration and production companies (E&Ps) we’ve been tracking returned to profitability in the first quarter of 2017. This reversal of fortunes in peer group performance was driven mostly due to higher natural gas prices, which ended a massive flow of red ink that had principally resulted from big reserve write-downs. Now, with higher profits and cash flows, these producers are ramping up their 2017 capital budgets and planning for long-term production growth. Today we continue our series on the financial performance of 43 U.S. E&Ps, this time zeroing in on companies whose hydrocarbon reserves are mostly natural gas.
After posting significant pretax operating losses in 2015-16, U.S. oil-weighted exploration and production companies returned to profitability in the first quarter of 2017. The 180-degree turnaround in peer group results was driven not only by higher oil prices, but by major strategic and operational shifts. Most of the 21 E&Ps we’ve been tracking responded to the plunge in revenue that started nearly three years ago by optimizing their portfolios, shedding properties with higher breakeven costs to focus on core unconventional plays and implementing operational efficiencies that led to sharply lower drilling and completion costs. Today we discuss how, with higher cash flows and profits, crude oil producers are ramping up their 2017 capital spending to generate long-term production growth.
Higher crude oil and natural gas prices, improved efficiency in drilling and completion and other factors combined to give most U.S-based exploration and production companies (E&Ps) solid financial results in the first quarter of 2017 — a stark contrast to their performance in 2015 and 2016. Better yet, the turnaround is providing E&Ps with the optimism and wherewithal to significantly ramp up their planned capital spending this year and in 2018. It’s also giving them an opportunity to zero in on shale plays with low breakeven costs that will help them maintain profitability even if commodity prices stay flat or sag. Today we analyze the first-quarter financial results of a group of 43 U.S. exploration and production companies.
After cutting capital investment 71% between 2014 and 2016, the 13 diversified U.S. exploration and production (E&P) companies examined in our Piranha! market study are planning to increase 2017 capital spending by 30%. While this seems like a lackluster rebound compared to the 47% boost announced by oil-focused E&Ps, the diversified group’s totals are skewed by the pull-back strategy of giant ConocoPhillips. Excluding ConocoPhillips, the 12 other companies are guiding to a 48% increase in 2017 investment—very similar to their oil-weighted peers. Today we continue our Piranha! series on upstream spending in the crude oil and natural gas sector, this time zeroing in on E&Ps with a rough balance of oil and gas assets.
The 21 oil-focused U.S. exploration and production companies examined in our Piranha! market study are planning an average 47% increase in their 2017 capital expenditures and expecting a 7% increase in production. The 47% boost in capex is huge, but due to draconian cuts in 2015 and 2016 this year’s total is still off 58% from 2014’s—an indication of the big hole the sector is still climbing out of. The Permian Basin continues to attract more capital—no surprise there—but capex in the Bakken is also on the rise after a few lean years. Today we continue our Piranha! series on upstream spending in the oil and natural gas sector, this time zeroing in on E&Ps that focus on crude.
In connection with 2016 earnings releases, U.S. exploration and production companies (E&Ps) have announced a surge in capital spending for 2017 after slashing investment by an average 70% from 2014-16. Our “Piranha” universe of 43 E&Ps is budgeting a 42% gain in organic capital outlays with a strong focus on the major U.S. resource plays. Despite crude prices languishing at an average of ~$47/bbl since January 2015, most of the upstream industry has weathered the crisis remarkably well, primarily through the “high-grading” of portfolios, impressive capital discipline, and an intense focus on operational efficiencies. Today we review the overall outlook for 2017 upstream capital spending and oil and natural gas production, and take an initial look at expectations for our group of companies.