Nick Cacchione

Out of the long, brutal struggles to create a British nation in the Medieval Ages arose the legend of Camelot, an idyllic kingdom that for a “brief shining moment” enabled its inhabitants to bask in peace and prosperity. In the second quarter of 2022, U.S. oil and gas producers that had, for the last two decades, been roiled with severe price volatility, recession, environmental pressures, investor hostility and a pandemic, finally found their Camelot. Rising oil prices and surging natural gas realizations drove per-unit revenues to a 15-year high, and nearly nine out of 10 of the incremental dollars fell straight to the bottom line as producers successfully wrangled inflation to keep costs under control. The result was E&P coffers overflowing with record earnings and cash flows. However, Camelot, in the words of the 1960 musical, was “a fleeting wisp of glory,” and clouds are emerging on the horizon for U.S. E&Ps in the third quarter. In today’s RBN blog, we catalog Q2 2022 results and preview the issues that could impact third-quarter earnings.

The oil and gas industry has historically been roiled by global economic and political crises, from the oil embargo in 1973 to the Great Recession of 2008 to the onset of the global pandemic in early 2020.  However, amid the economic and political turmoil from the war in the Ukraine, rampant inflation and supply chain disruptions, E&P companies in recent weeks reported strong results for the first quarter of 2022, riding the wave of rising commodity prices as record volumes of cash flowed into corporate coffers. Producers successfully absorbed service cost increases and resisted calls to abandon their profits-focused fiscal discipline to generate Q1 2022 pre-tax operating earnings and cash flows that were up 25% and 12%, respectively, from the two-decade-high results recorded in the last quarter of 2021. In today’s RBN blog, we detail the industry’s outstanding results and preview its performance for the rest of the year.

With soaring oil prices dominating recent headlines, it’s no surprise that profits and cash flows for the U.S. exploration-and-production (E&P) sector rebounded dramatically in 2021 from heavy, pandemic-induced losses in 2020. Rising crude oil and natural gas demand fueled a whopping $150 billion turnaround in results, as the 43 major publicly traded E&Ps we monitor recorded $86 billion in pre-tax income after incurring a net loss of $66 billion in 2020. Oh, and by the way, 2021 was the most profitable year in at least the last two decades for producers, which reported income two-thirds higher than the previous peak in 2014, when commodity prices were significantly higher. In today’s RBN blog, we compare producers’ 2021 performance with 2020 and 2014 and explain why results should be even stronger this year.

It may seem like a strange turn of phrase, but the best way to describe the E&P sector’s recent round of quarterly earnings calls is a celebration of remarkable climate change. Buffeted and nearly swamped over the past few years by price volatility, investor revolt, regulatory restrictions, and a global pandemic, oil and gas producers finally have the opportunity to bask amid robust returns in an increasingly sunny economic environment. E&Ps are enjoying higher profits and massive free cash flow, raising their dividends, and looking forward to 2022 with renewed optimism. In today’s RBN blog, we outline the dramatic recovery of E&Ps since mid-2020, examine the surge in third-quarter results, and look ahead to the next round of earnings calls this winter.

For many years, the exploration and production sector of the oil and gas business was notorious for its profligate ways. When energy prices were high and money was flowing in, many E&P companies would spend like Beyoncé. But the commodity price volatility of the past few years gave E&Ps a new-for-them financial discipline. Even when prices rebounded, they held down their capital spending, and focused on paying down debt and returning cash to shareholders in the form of stock buybacks and dividends. But there’s been a shift in all that lately, with a bigger share of the inflowing money now being used to build cash balances. In today’s RBN blog, we analyze recent cash flow allocation by the 38 E&Ps we monitor and examine what this new shift may mean.

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.

The return of $70/bbl WTI raises an important question: With a lot more cash flowing in, will public E&Ps maintain the financial discipline they’ve tried to live by since the crude oil price crashes of 2014-15 and, more recently, the spring of 2020? We’ve said it before, but it bears repeating that many producers once prided themselves on the riverboat-gambling nature of their business but, after a major scare or two, came to adopt a far more conservative approach to investment based on their new 11^th commandment: “Thou shalt live within cash flow.” Emerging from the pandemic, E&Ps’ 2021 capital investment announcements guided to maintenance-level outlays designed to maximize free cash flow for debt reduction and returning cash to shareholders through dividends and share repurchases. Still, old habits die hard, right? So, when oil prices strengthened and cash flow soared in the first few months of 2021, we wondered if producers would give in to temptation to reap short-term benefits from their accelerating output. Today, we analyze the actual first quarter cash-flow allocation of the 39 E&P companies we monitor and compare it with the deployment of cash flow in 2019 and 2020.