Posts from Nick Cacchione

Sunday, 04/26/2020

COVID-related demand destruction and the oil price meltdown have engulfed energy markets and companies in a thick, pervasive shroud of doom and gloom. But investors and analysts have hit upon a potential bright spot for one segment of the industry: Gas-Weighted E&Ps that had been battered by the decade-long shift of upstream capital investment to crude-focused resource plays. The massive cutbacks in 2020 capital investment by oil producers triggered by the recent, dramatic decline in refinery demand for crude will reduce not only oil output, but associated gas production as well. That drop in supply raises the prospect of meaningful increases in natural gas prices in 2021 –– hence Wall Street’s new interest in Gas-Weighted producers, whose equity values have taken off in recent weeks after a big plunge earlier this year. There’s a lingering concern though, namely that LNG exports — a key driver of gas demand for U.S. producers — may be slowed by collapsing gas prices in key international markets. Today, we discuss what’s been going on. 

Tuesday, 04/07/2020

E&Ps have long been accustomed to negative investor sentiment and the depressed stock valuations that come with it. But who among them could have anticipated the first quarter’s devastating one-two punch of coronavirus-related energy demand destruction and the collapse of the OPEC+ supply-management effort that for more than three years had propped up crude oil prices? E&Ps responded by slashing their 2020 capital spending plans and touting how much of their 2020 production is hedged. But there’s no doubt about it, the E&P sector is in for particularly hard times, as evidenced by Whiting Petroleum’s Chapter 11 filing last week. A major impediment for Whiting and other already hobbled E&Ps is a cost structure that, for many, significantly exceeds the current price of oil. Today, we discuss what an examination of more than 30 E&Ps’ lifting, DD&A and other costs reveals about the companies’ ability to stay afloat in rough seas.

Thursday, 03/19/2020

You wouldn’t know it yet from outright crude oil production volumes, which stood at 13.1 MMb/d last week, but with crude oil prices in the cellar, the situation for U.S. E&P companies has rapidly gone from bad to worse. The double whammy of the coronavirus and the Saudi’s decision to flood oil markets with new production has cast a pall over the U.S. E&P sector, sending share prices plummeting. Producers had already taken a stripped-down approach to 2020 investment, with previous guidance reducing capital expenditures by 14% in order to boost free cash flow and hike shareholder returns. That was on top of the 7% decline in capex seen in 2019. But in the last 10 days, about half of the 42 E&P companies we track have announced further, substantial cuts in planned capex. And with West Texas Intermediate prompt crude oil futures settling at $25.22/bbl yesterday — well below breakeven for many producers — and still-lower prices a real possibility, more industry-wide reductions are looming as first-quarter earnings are announced in April. Today, we break down what the recent announcements mean for capex and production volumes.

Tuesday, 12/17/2019

There has always been an aura of excitement, adventure and risk surrounding the quest to unlock natural resources, from the California Gold Rush to the early days of Texas oil wildcatting. Today’s exploration and production leaders may be just as passionate as their predecessors, but the “riverboat gambler”-type days of reckless spending in pursuit of growth now seem like a distant memory. In the brutal aftermath of the oil price crash in late 2014, producers have been forced to follow their heads instead of their hearts, adopting a far more careful approach to investment that prioritizes portfolio rationalization over expansion, and cash flow above growth. E&P companies in 2019 slashed capital investment, and, according to early guidance, they will again in 2020. Underscoring this more conservative attitude is the release of the 2019 Securities and Exchange Commission price deck, which impacts the economics of booking oil and gas reserves. It showed the WTI oil price for SEC reporting purposes declined about $10/bbl, or 15%, to $55.69/bbl in 2019, while the Henry Hub SEC price declined by 17%, to $2.58/MMBtu. Today, we examine a representative group of U.S. E&Ps’ spending plans for 2020, which reflect the impacts of a lower-price environment.

Sunday, 11/24/2019

With oil and gas prices drifting lower and markets continuing to pummel exploration and production companies, shareholders and analysts approached the third-quarter 2019 earnings season with the sense of impending doom akin to awaiting the results of an IRS audit. There was a lot of talk that the Shale Revolution was fizzling out and that the industry was approaching yet another financial Armageddon, like the 2014-15 oil price crash crisis. But the results belied the worst fears: while lower commodity prices did reduce profits and cash flows, E&Ps as a group remained solidly profitable in the third quarter, with 40 of the 47 companies we track ending up in the black. The reductions in operating income and cash flows were generally in line with lower realizations from oil and gas sales, although lower commodity prices did trigger some write-downs of properties that could no longer be profitably developed. Once again, E&Ps held the line on costs, continuing the financial discipline that fueled the industry’s recovery after the mid-decade price crash. Although producers generally cut back expenditures in line with lower cash flows, increases in drilling efficiency allowed production to keep growing. Today, we examine the financial health of the 47 E&Ps we track in this analysis and the ways they are navigating the price downturn.

Wednesday, 10/16/2019

Extreme makeovers by exploration and production companies over the past five years have resulted in higher crude oil and natural gas production, lower costs and more money for shareholders in the form of dividends and share buy-backs. Despite all this, investors have continued to abandon the E&P sector, with the S&P E&P index sliding to a series of record lows: down 75% from its 2014 peak, down 51% from a year ago, and down 5% from this time last month. Why the major disconnect? Today, we examine the improving financial health of most of the 48 E&Ps we track in this analysis and the reasons why investors remain wary of E&P equities.

Thursday, 09/19/2019

You may not know it by the look of the S&P E&P stock index, which has been flirting with record lows in recent weeks, but exploration and production companies are continuing to defy the industry’s legendary boom-and-bust cycles by pumping out increasing volumes of crude oil and natural gas while slashing spending. Some types of E&P companies have fared better than others in this lower-price environment. How are they continuing to generate substantial production growth under sharply lower capital investment programs? Today, we update our analysis of capital expenditures and production growth based on the second-quarter results of the 43 U.S. oil-focused, gas-focused, and diversified producers we track.

Wednesday, 08/28/2019

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.

Wednesday, 05/29/2019

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.

Thursday, 05/09/2019

U.S. exploration and production companies (E&Ps) are tapping the brakes on their capital spending in 2019 after two years of strong investment growth and a return to profitability that in 2018 approached the level generated in the $100+/bbl crude oil price environment back in 2014. The pull-back in capex this year appears likely to slow the pace of production growth, and comes despite a 30% rebound in crude oil prices in the first quarter of 2019. What’s going on? Well, many investors remain skeptical about E&Ps, as evidenced by stock prices that remain in the doldrums, and to gain favor with investors, a number of E&Ps are returning cash to them in the form of share buybacks and higher dividends. Today, we consider the current state of investment in the E&P sector, how it’s affected by stock valuations and how it affects production growth.

Thursday, 04/25/2019

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.

Monday, 04/01/2019

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.

Wednesday, 02/20/2019

Once the “riverboat gamblers” of U.S. industry, executives at exploration and production companies got religion after the brutal oil price crash in late 2014 and adopted a far more conservative approach to investment based on their new 11th commandment: “Thou shalt live within cash flow.” So it’s no surprise that early 2019 guidance issued by more than half of the 45 major E&Ps we track shows them cutting back capital investment in response to last fall’s decline in oil prices from a more optimistic scenario a year ago. Nearly three-quarters of the 26 companies reporting their 2019 guidance are reducing exploration and development outlays, while only three of the remainder are budgeting increases greater than 10%. What is surprising is that these forecasts include solid production growth virtually across the board, especially for E&Ps that focus on crude oil. Today, we look at how a representative group of U.S. E&Ps are dealing with lower crude prices.

Thursday, 12/13/2018

The third quarter of 2018 was a moment in the sun for U.S. exploration and production companies. The 44 major companies we track reported a 35% increase in pre-tax operating income over the previous quarter and seven-fold increase from the year-ago period on rising commodity prices and narrowing differentials in some key regions. Oil-Weighted producers outside the infrastructure-constricted Permian posted generally higher realizations, and a number of Permian-focused E&Ps minimized the impact of takeaway constraints by employing basis hedges, utilizing firm transportation contracts and reducing their operating costs. Diversified producers saw higher quarterly per-unit profits thanks to the tilt of their portfolios toward oil. And as lower Appalachian differentials lifted the realizations of Gas-Weighted producers, portfolio readjustments and the liquids content of production also positively impacted their profitability and cash flow. Today, we analyze third-quarter results by peer group, and discuss the potential impacts of the sudden plunge in oil prices this fall.

Thursday, 11/29/2018

The sun was shining and wind filled the sails of the 44 major U.S. exploration and production (E&P) companies we track in the third quarter of 2018 as they collectively reported a 35% increase in pre-tax operating income over the previous quarter. It’s been an up-and-down year. Increased efficiency and rising output from the transformation to large-scale, manufacturing-style exploitation of premier resource plays moved the E&P sector solidly into the black in early 2018 after three years of losses. But profits stagnated in the second quarter on a decline in revenues as widening differentials, primarily in the Permian Basin, negated the impact of higher NYMEX prices. Today, we explain how producers overcame the headwinds to resume profit growth in the third quarter, but warn that future returns for certain E&Ps could be jeopardized by the sudden plunge in oil prices.