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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q1 2018

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Production outlook

This theme relates to targeted production levels and factors that may impact a company’s ability to grow production. Key issues raised on production outlook include:

  • Clarification on the underlying production decline rates
  • The status of producing assets in countries where there are security issues
  • If sufficient takeaway capacity has been secured in US shale plays
  • Whether there are any constraints on production growth due to infrastructure or service capacity bottlenecks
  • Factors that may lead to production being at the lower or upper end of guidance range in the next year
  • The contribution of recent major project start-ups to production
  • “Estimates of future US onshore oil production may overstate the growth potential. Producers are prioritizing shareholder returns and have resisted raising capital spending in line with higher oil prices. However, the US shale industry is at risk of becoming a victim of its own success. Some producers are hitting transportation bottlenecks, with pipelines operating at near capacity.”

    — Vance Scott, EY Americas Oil & Gas Transaction Advisory Services Leader

Major project updates

This theme relates to the execution of major projects and the pipeline of capital projects. Key issues raised on major projects include:

  • Whether final investment decisions are expected on any major projects in the short term
  • Updates on the status (cost and schedule) of planned new project start-ups
  • When major projects under development are likely to begin contributing to cash flow
  • Response to partner comments relating to progress with major projects
  • Milestones that need to be achieved for projects to move towards FID
  • The competitiveness of pre-FID projects in the pipeline
  • Whether acquisitions will slow the pace of new FIDs while the acquired assets are being integrated
  • "The era of the oil and gas megaproject is drawing to a close. Projects sanctioned today are typically smaller-scale, more standardized and are being executed to a higher performance standard. They also have lower breakevens, making them more resilient. And new upstream projects are increasingly being digitally enabled to optimize drilling, completion and production."

    — Jeff Williams, EY Global Oil & Gas Advisory Leader

Portfolio optimization

This theme relates to questions on the appetite for further asset sales or purchases. It includes observations on the state of M&A markets. Additionally, it incorporates issues of portfolio balance and exposure to particular asset classes. Key issues raised on portfolio optimization include:

  • Whether companies have reset their asset sales targets following the completion of major divestment programs
  • The assets within the portfolio that are considered core or non-core
  • Appetite and capacity for opportunistic bolt-on acquisitions
  • If higher oil prices would lead to more deal activity
  • Potential alliances with NOCs that could help build the portfolio in particular locations
  • How potential acquisitions compare to the organic FID options in the portfolio
  • Whether commitments to return cash to shareholders may limit the capital available for M&A activity

Capital spending guidance

This theme relates to the flexibility that companies have to ramp up or down their capital expenditure in response to market conditions. Key issues raised on capital expenditure include:

  • Whether the level of planned capital spending is sufficient to offset production declines
  • If lower planned capital spending is the result of deflation or efficiency gains
  • Reasons for capex trending above or below guidance and any changes to full-year targets
  • Early indications of the potential range for capital spending for the next two to three years
  • If lower levels of capital spending represent a new sustainable level going forward

Shareholder distributions

This theme relates to a company’s strategy on shareholder returns, any changes to that strategy and potential constraints on delivery. Key issues raised on shareholder distributions include:

  • The potential to raise the dividend due to stronger cash flows and balance sheets
  • The priorities for cash – shareholder pay-outs, debt repayment or reinvestment and returns to investors through capital investment
  • The factors that would trigger the resumption of share buyback programs and the potential size of such programs
  • Possible market constraints on the delivery of planned share buybacks

Cost control

This theme relates to actions companies have taken to reduce costs and trends in the cost of equipment and services. Key issues raised on cost control include:

  • Scope for further reductions in operating costs compared with previous guidance
  • Guidance on the sustainable level of operating costs going forward
  • The ability of technology to lead to another step-change in the cost structure
  • Whether inflationary pressures in the US onshore are likely to result in higher unit costs
  • If cost deflation has bottomed-out in certain geographies

Policy and regulation

This theme relates to the benefits, risks and challenges that may arise from digitalization. Key issues raised on digitalization include:

  • The impact of stricter sanctions in Russia on operations in the country
  • Implications of the Dutch Government’s decision to restrict output at the Groningen field due to concerns over earth tremors
  • Potential investments in refining assets that may be required due to IMO 2020
  • Difficulties in getting pipeline projects sanctioned due to environmental regulations
  • Whether any fiscal regime changes are anticipated in deregulating markets
  • "The process for gaining regulatory approval for new oil and gas pipeline projects is becoming more challenging. In the US, states are denying key permits on environmental grounds, and in Europe, the Nord Stream 2 pipeline is dividing the region’s politicians. Meanwhile, President Trump’s decision to withdraw the US from the Iran nuclear deal has resulted in a risk-premium being applied to oil prices."

    — Derek Leith, EY Global Oil & Gas Tax Leader

Tax position

This theme relates to expected tax rates and costs, and also government fiscal policies. Key issues raised on tax include:

  • Guidance on expected cash tax payments in 2018 at a given oil price
  • The status of any tax disputes that remain to be settled
  • Whether US tax reform has made investing in the US oil and gas sector more attractive
  • The relative competitiveness of fiscal terms across different countries

Cash flow targets

This theme relates to the balance between sources and uses of cash. Key issues raised on cash flow include:

  • Identification of one-time reasons for variations in cash flow quarter-on-quarter and full-year guidance
  • The level of oil or gas price required to be cash flow breakeven
  • The priorities for the use of excess cash flow that is expected with higher oil prices
  • Why higher oil prices are failing to translate into proportionate increases in free cash flow
  • The main factors leading to cash flow being higher than expected given previous guidance on sensitivities

Price realizations

This theme relates to the oil and gas prices companies are realizing in their upstream businesses and refining margins being realized in their downstream businesses. Key issues raised on price realizations include:

  • The potential to capitalize on wider price differentials in North America
  • Exposure to price discounts in certain shale plays relative to WTI
  • The reasons for increases in realized prices being higher than increases in global market prices
  • The logistics strategies companies are adopting to ensure they have sufficient takeaway capacity in the US onshore to minimize exposure to price discounts
  • "The spread between the price oil producers in the Permian basin receive relative to the WYI Cushing benchmark has widened because soaring production has exceeded takeaway capacity. Companies that haven’t secured pipeline capacity to move Permian oil to the Gulf Coast are most exposed to double-digit discounts. The growth in production has also led to a boom in the number of proposed new pipelines."

    — Andy Brogan, EY Global Oil & Gas Transactions Leader

Overview of Q1 2018 themes

  • Some companies’ first quarter results fell short of expectations but all ended the period with their balance sheets in more robust health. The focus is on growing cash flow, reducing debt and returns for shareholders. Companies are saying the right things on capital discipline. Capital spending guidance was a top four theme in the first quarter. But will companies hold their nerve if oil prices remain above US$60/bbl for a sustained period? Some investors are yet to be convinced. They don’t trust companies to remain disciplined.
  • However, even if companies wanted to increase spending, they may run into constraints on their ability to grow production. Production outlook was the top theme in Q1. Higher interest rates mean there is less cheap debt available to fuel another growth spurt. In the US, some onshore producers are facing infrastructure bottlenecks. Midstream capacity to alleviate some of the bottlenecks is under construction, although some projects may be delayed by the denial of necessary state permits for pipelines that cross their region. There is tension between the Federal Government’s desire to boost oil and gas output and opposition on environmental grounds at the state level. The theme of policy and regulation moved up to seventh place in the ranking in the first quarter.
  • US onshore operators that haven’t secured sufficient takeaway capacity are exposed to Permian price discounts. In Canada, companies are also facing delays and legal challenges to proposed pipeline projects. Federal or provincial government investment is being considered as a way to get one stalled project moving. Some refiners were able to take advantage of wide light-heavy crude differentials by running more Canadian crude through their plants. The theme of price realizations re-entered the top ten ranking in the first quarter.
  • The industry has reached the end of a period of multi-billion dollar capital spending on large projects. Projects sanctioned prior to the downturn are now coming into production, helping to boost cash flow. Attention has now shifted to the projects that could be sanctioned this year. The theme of major project updates climbed to second spot in the ranking. Break-evens have trended lower through a combination of cost deflation plus self-help measures. The next generation of projects will be more standardized, lower cost and digitally enabled.

The first quarter results were mixed but there was unity in companies’ comments on capital discipline. Investors still don’t trust that companies will hold their nerve. US$60+/bbl oil could prove too tempting for some in the US shale patch. However, the industry has become a victim of its own success. Taking away capacity bottlenecks could put the brakes on further production growth. The Q2 story may well be one of infrastructure constraints rather than capital restraint.

Adi Karev,
EY Global Sector Leader, Oil & Gas

EY contacts

Adi Karev
EY Global Oil & Gas Leader
+852 2629 1738

Derek Leith
EY Global Oil & Gas Tax Leader
+44 12 2465 3246

Andy Brogan
EY Global Oil & Gas Transactions Leader
+44 20 7951 7009

Gary Donald
EY Global Oil & Gas Assurance Leader
+44 20 7951 7518

Jeff Williams
EY Global Oil & Gas Advisory Leader
+1 713 750 5916

Scope, limitations and
methodology of the review

The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q1 2018 earnings reporting season among 12 global oil and gas companies. The identification of the top 10 themes is based solely on an examination of the transcripts of the earnings conference calls held from 19 April to 4 May 2018.

For this analysis, the following companies were included:

  • BP plc
  • Chevron Corporation
  • ConocoPhillips
  • Eni SpA
  • Exxon Mobil Corporation
  • Husky Energy Inc
  • Repsol SA
  • Royal Dutch Shell plc
  • Statoil ASA
  • Suncor Energy Inc
  • TOTAL S.A.
  • Woodside Petroleum Ltd