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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q3 2017

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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:

  • The assets within the portfolio that are considered core or non-core
  • Appetite for selective bolt-on acquisitions to high-grade portfolios
  • The attractiveness of entry into specific new geographies or plays
  • The extent of the pivot to shorter cycle time, high-return investments
  • Where companies are seeing the greatest value for potential acquisitions
  • The preference for operated or non-operated assets in acquisitions
  • Perspectives on whether the bid-ask spread has narrowed
  • "Uncertainty around long-term demand, the impact of disruption and pace of innovation are compelling oil and gas companies to review their portfolios more frequently. Technology and advanced analytics are enabling real-time assessment of performance and returns allowing companies to better identify trends. Those who take action to adjust their portfolios and re-allocate capital will be able to take advantage of new growth opportunities gaining a competitive edge."

    — Andy Brogan, EY Global Oil & Gas Transactions Advisory Services Leader

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:

  • Reasons for CAPEX trending above/below guidance and any changes to full-year targets
  • Early indications of the potential range for capital spending for the next 2-3 years
  • The impact of lower levels of capital investment on production growth longer term
  • The ability to adjust capital expenditure budgets in response to lower or higher oil prices
  • Whether the planned level of capital spending is sufficient to sustain or replenish the portfolio
  • If lower levels of capital spending represent a new sustainable level going forward
  • "Capital discipline remains a strategic imperative for oil and gas companies. Organizations are carefully scenario planning for commodity price ranges, balancing discretionary capital expenditures with near-term productivity investments with a focus on shareholder returns. Competition for capital has never been greater, investors will reward companies who demonstrate capital discipline to sustain returns through the commodity price cycles."

    — Kent Kaufield, EY Energy Market Segment Leader — Canada

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
  • The expected level of production associated with a given number of active rigs in the US onshore
  • The impact of asset divestments or new project start-ups on planned production levels
  • Production levels relative to guidance and reasons for any significant deviations

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 prospect of raising 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 conditions that would be required to trigger the removal of scrip dividend programs and the anticipated timeframe for removal
  • The factors that would trigger the resumption of share buyback programs and the potential size of such programs

Major projects 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
  • The impact of hurricanes on the expected start-up date of major projects under construction in affected regions
  • The response to partners’ comments on major joint projects

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 if oil prices turn out to be higher than planned
  • The free cash flow expected to be generated in a specific region or asset class
  • The contribution to cash flow from the start-up of major new projects
  • "Operating within cash flows is the critical breakeven point for the oil and gas industry in the current environment, as companies across the sector need to show that they can cover capital expenditures as well as dividends at current commodity prices. Oil and gas companies must continue to focus on cost efficiency and sound operational execution, while also balancing capital investment."

    — Jeff Williams — EY Global Oil & Gas Advisory Leader

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 reduction include:

  • Scope for further reductions in operating costs compared with previous guidance
  • Guidance on the sustainable level of operating costs going forward
  • Any concerns over the financial resilience of the supply chain due to customer demands for lower costs
  • Whether deflationary trends are still prevalent in regions outside the US

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 potential implications of fiscal policy changes and tax rulings in particular countries
  • The relative competitiveness of fiscal terms across different countries
  • "Jurisdictions around the world continue to focus on transparency and reporting. In the US, the tax reform efforts continue to dominate discussions, with the hope that any tax reform changes can provide certainty for both short and long-term planning and transactions."

    — Greg Matlock, EY Americas Energy Tax Leader

Exploration strategy

This theme relates to companies’ exploration plans and the status and results of major drilling programs. Key issues raised on exploration strategy include:

  • Where particular prospects fit within companies’ exploration plans
  • Whether companies are looking to exploration to replenish their portfolios after recent cutbacks in spending
  • Updates on well drilling programs and also the prospect size that companies are targeting

Policy and regulation

This theme relates to the impact on the oil and gas industry of proposed new policies or regulations. Key issues raised on policy and regulation include:

  • The preparations being made in the refining business for the introduction of new marine fuel regulations
  • The impact of the potential imposition of tougher sanctions by the US on Iran
  • The implications of government policy measures designed to ease the gas shortage in eastern Australia

Overview of Q3 2017 themes

A leaner industry is emerging from the downturn. Most companies can now breakeven at US$50/bbl or less. Some have sufficient confidence in the sustainability of the recovery to consider improving returns for investors. They have committed to offset the dilution from the scrip dividend and begin buybacks. There may be some bumps on the road to recovery but the worst is behind us.

  • The mood during the third quarter earnings reporting season was generally more upbeat than in prior quarters. In November, Brent crude oil prices broke through the US$60/bbl level for the first time since mid-2015. There are likely to be some bumps along the road to recovery, but there is growing consensus that the worst is behind us. Most companies have shown that they can live with US$50/bbl oil. A leaner industry is emerging from the downturn.
  • The theme of portfolio optimization moved from the fourth spot up to the first in the rankings in the third quarter. The M&A agenda is slowly shifting from retrenchment to selective growth. The latest EY Oil & Gas Capital Confidence Barometer supports this trend with 96% of respondents saying the M&A market will improve or remain stable over the next 12 months. With greater confidence in short-term oil prices, companies may favor assets that provide production over longer-life developments.
  • Capital spending guidance was the second most popular theme in the third quarter. Despite the more upbeat mood, capital spending budgets for 2018 have not been revised upwards as companies are remaining disciplined on spending and costs. Shale operators are also showing more restraint. Lenders are demanding that they focus on value rather than growth at any cost. The US onshore rig count fell for eight consecutive weeks between the middle of September and early November.

There are still concerns about the longer-term implications of continued spending restraint. Concerns were raised on some of the earnings calls about the financial sustainability of the supply chain, given the depth and duration of the spending cuts by oil and gas companies. The IEA has expressed a view that oil prices could spike by 2020 if investment doesn’t begin to pick-up. Some oil industry executives have added their voices to this view, but with one of the longest downturns in the history of the industry still fresh in most minds, this won’t be what keeps the CEOs of oil and gas companies awake at night.

Adi Karev,
EY Global Sector Leader, Oil & Gas

EY contacts

Adi Karev
Global Oil & Gas Leader
+852 2629 1738

Alexey Kondrashov
Global Oil & Gas Tax Leader
+9 715 6416 2251

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

Gary Donald
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 Q3 2017 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 31 October to 3 November 2017.

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