The Tale Of Two Shale Revolutions -- Re-Posting -- For The Archives -- April 2, 2019

Updates

April 2, 2018: Look at this, today, April 2, 2019, from the Rigzone staff: E&P cash surge could mean return to super profits. Link here.

The world’s public E&P companies saw their free cash flow surge to nearly $300 billion last year and 2019 may be just as promising, according to analysis by Rystad Energy, head of upstream research Espen Erlingsen.

Rystad looked at estimated global FCF for all public E&P companies since 2010. Their analysis shows that FCF peaked in 2011 but declined between 2012 and 2014 due to increased budget investments and more commitments.

The FCF was reduced considerably in 2015 as the oil price collapsed.

However, since 2015, FCF has had a gradual recovery to the all-time highs of today.

“Our analysis of the latest annual reports from the majors clearly indicates that ‘super profits’ are back for large E&P companies,” said Erlingsen. “Free cash flow before financing activities was at a record high in 2018, and the mega profits were typically used to pay down debt and increase payments to shareholders.”

And thanks to higher oil prices, lower development costs and lower investment activity, Rystad believes 2019 could be another “blockbuster year.”

“…almost 70 cents for every dollar in profits generated last year for these companies ended up in shareholders’ pockets,” Erlingsen said.

This will be re-posted at the linked post above to keep this all together in one spot.

Graphic from the story linked above:

 

 Original Post

For the archives.

Two posts re-posted.

First, the one in which someone suggests that the shale revolution could end very, very badly because shale oil companies are not making money; most of not made a dime since the revolution began. That post begins:

Over the weekend I spoke to an individual who was the chief operations officer for a "mom-and-pop" Texas oil company some years ago. That company barely survived the Saudi deluge 2014 - 2016, and he moved on. He has not followed the oil industry particularly closely.

He reads much more than I do, but it is mostly "current events," a lot of surfing the net, not books. He was probably in his early 40s -- in round numbers, 40 years old. I am in my late 60s -- in round numbers 70 years old.

Some of his observations, our conversation.

He did not say anything that I had not heard before.

1. He suggested the oil sector today was much like the housing melt-down we had some years ago that caused the big crash. He reiterated the trope that no shale company has yet "made a penny." The shale oil companies were over-leveraged, lots of debt, and the banks must be terribly concerned. For argument's sake, I agreed, but noted that from owners and directors down to roughnecks and mineral owners, "everyone" was making money. The only two exceptions: investors and the banks. On that, we both agreed.

2. He talked about the shale sector as one entity; that it risked failing and taking investors and bankers along with it. Roughnecks, etc., would be laid off in huge numbers; the industry would implode. He referenced the US oil implosion of the 1980s. Whether it would affect the national economy (GDP) he was not sure. I pointed out that 'boom and bust" / wide swings in the oil sector were the norm in the oil industry. I said I doubted the entire sector would self-destruct. Some companies will fail/some will prosper. We saw this in 2014 - 2016 and in the big picture things seemed to work out relatively well, Perhaps very well for some. Really bad for others.

And it goes on much longer.

Second, the post from earlier today, linking an RBN Energy post that suggests E&P profits are surging.

RBN Eenrgy: surging E&P profits, lower costs belie negative sentiment. Archived.

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.

U.S. exploration and production companies (E&Ps) have found it very difficult to shake the aura of doom and gloom that shrouded the industry after the 2014-15 oil price crash brought many to the brink of insolvency. Investor sentiment, as reflected in the S&P Oil and Gas E&P stock index, tells the tale. After reaching a high of more than 12,000 in mid-2014, the index plunged to as low as 3,600 in early 2016. With crude prices and profits rising after that, the index climbed back to about 6,600 in the fall of 2018, but plummeted nearly 40% to 4,000 — one-third of the 2014 high — in the second half of December (2018) on fears of a return to red ink as oil prices dipped to $45/bbl. But recently released 2018 financial results from our universe of 44 major U.S. E&Ps provided strong evidence that belied the negative sentiment about the sector.

Despite the fourth-quarter oil price decline, the industry roared back to profitability in 2018. 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. Remarkably, the Diversified E&P Peer Group — whose portfolios are roughly balanced between oil and gas — generated $14.10 per barrel of oil equivalent (boe) in profits in 2018, 7% higher than the $13.20/boe the group netted in 2014, when revenues were much higher. And with first-quarter 2019 oil prices rising 30% — the largest quarterly increase since 2009 — the industry appears to be on track for solid profitability again in 2019.