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2016-12-15 18:50:00

UPSTREAM'S EARNINGS UP

UPSTREAM'S EARNINGS UP

EIAOil production companies recorded positive earnings from their upstream (exploration and production) operations in the third quarter of 2016 for the first time since the fourth quarter of 2014. According to recently released earnings statements from 102 global oil companies, aggregate earnings from upstream operations totaled almost $4.8 billion. Even though this is considerably lower compared with earnings from 2011 to 2014, earnings recovered from significant losses that occurred throughout 2015 and the first half of 2016 (Figure 1). Oil companies have recently increased price hedging activity that, along with higher earnings, could suggest companies are reducing price risk with plans to increase investment and future production.

 

UPSTEAM EARNINGS OIL PRICE 2011 - 2016

 

The companies in this study produced 33.9 million barrels per day (b/d) in the third quarter, accounting for about one-third of global liquids production. Despite the decline in crude oil prices that began in the third quarter of 2014, many producers have been able to maintain or slightly increase production. Production was slow to decline because many projects that were approved for development between the 2011 and 2014 period did not begin production until 2015 or 2016, offsetting natural declines from existing wells and cancellation of projects that were more sensitive to lower prices.

Over the past two years, many companies recorded losses as they wrote down the value of their assets—called an impairment—in the low-price environment. An impairment reflects assets that have estimates of future net cash flows below what a company has already spent to develop them. Impairments reduce earnings in the quarter in which a company recognizes them, but are nonrecurring reductions. As oil prices have traded between $40 per barrel (b) and $50/b since the second quarter of 2016, impairments declined significantly from 2015 to 2016, contributing to higher earnings from upstream production. Companies focused on U.S. onshore operations—which experienced comparatively larger impairments than other companies—are beginning to see an increase in earnings: over one-half of the companies focusing on U.S. onshore operations had positive earnings in the third quarter of 2016, an increase from the first quarter of 2016 when only 9% of these companies recorded positive earnings (Figure 2).

 

UPSTREAM EARNINGS 2011 - 2016

 

Companies typically need to access external sources of capital, such as debt or equity, to finance investment in projects that will increase production and operating cash flows. The crude oil price decline significantly reduced cash flow for all companies, and many U.S. onshore companies were at risk of defaulting on debt payments or having their access to capital reduced. However, most companies have reduced their capital expenditures at a faster pace than the decline in cash flow, lowering the amount that must be raised from capital markets. U.S. onshore producers and other companies have reduced the ratio of capital expenditures to cash from operations to the lowest level since at least 2011 (Figure 3). Lower capital expenditures suggest lower production in the future, although lower costs and improved operating efficiencies can lessen this impact on the oil market.

 

UPSTREAM CAPITAL EXPENDITURE CASH FLOW 2011 - 2016

 

Some companies, however, announced flat or slightly increased future capital budgets in their latest quarterly statements. In addition, recent increases in short positions held by producers or merchants suggest crude oil producers are hedging the price risk of their future production. Because investment in new production has large upfront costs and long lead times, some producers mitigate future price risk through selling futures contracts, which locks in prices now. As of December 6, short positions in West Texas Intermediate (WTI) futures held by producers or merchants reached an all-time high, according to the Commodity Futures Trading Commission (CFTC).

Figure 4 illustrates that differences between prices throughout the WTI futures curve now support the likelihood of increased selling on longer-dated contracts. The difference between January 2017 and December 2017 WTI prices remain in contango (when near-term prices are less than longer-dated ones), reflecting currently high inventories and the expectation of inventory increases throughout 2017. The difference in WTI prices between December 2017 and December 2018, however, developed backwardation (when near-term prices are greater than longer-dated ones), settling at 89 cents/b as of December 13, reflecting expectations for inventory withdrawals to begin in 2018. If producers hedge their future price risk, it could indicate planned increases in future capital expenditure and production.

 

OIL PRICE FUTURES SPREADS

 

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Earlier: 

OIL PRICES: ABOVE $54 AGAIN 

РОССИЯ: ПОРА ДЕЙСТВОВАТЬ 

EXXON HEAD'S CHOICE 

SAUDI - RUSSIAN ALLIANCE 

RUSSIA SANCTIONS FOREVER 

CHEVRON'S INVESTMENT DOWN 15% 

WORLDWIDE RIG COUNT DOWN 369 

CHINA'S OIL BENEFITS 

OPEC PRODUCTION TARGET 32.5 MBD 

OIL INVESTMENT: -$1.99 TLN + $630 BLN 

2017: DEMAND RECOVERY 

ГЛОБАЛЬНОЕ ОБОСТРЕНИЕ КОНКУРЕНЦИИ

 

 

 

 

Tags: OIL, PRICES, PRODUCTION, UPSTREAM, EXPLORATION

Chronicle:

UPSTREAM'S EARNINGS UP
2017, December, 15, 12:50:00

LUKOIL'S PLAN: $50

LUKOIL - The plan is based on the conservative $50 per barrel oil price scenario. Sustainable hydrocarbon production growth is planned in the Upstream business segment along with the growth in the share of high-margin projects in the overall production. In the Downstream business segment, the focus is on the improvement of operating efficiency and selective investment projects targeted at the enhancement of product slate.

UPSTREAM'S EARNINGS UP
2017, December, 15, 12:45:00

BP INVESTS TO SOLAR

BP - BP will acquire on completion a 43% equity share in Lightsource for a total consideration of $200 million, paid over three years. The great majority of this investment will fund Lightsource’s worldwide growth pipeline. The company will be renamed Lightsource BP and BP will have two seats on the board of directors.

UPSTREAM'S EARNINGS UP
2017, December, 13, 12:40:00

OIL PRICE: ABOVE $64 YET

REUTERS - Brent crude was up 69 cents, or 1.1 percent, at $64.03 a barrel by 0743 GMT. It had settled down $1.35, or 2.1 percent, on Tuesday on a wave of profit-taking after news of a key North Sea pipeline shutdown helped send the global benchmark above $65 for the first time since mid-2015. U.S. West Texas Intermediate crude was up 45 cents, or 0.8 percent, at $57.59 a barrel.

UPSTREAM'S EARNINGS UP
2017, December, 13, 12:35:00

RUSSIAN-TURKISH NUCLEAR

ROSATOM - On December 10, 2017, the construction start ceremony took place at the Akkuyu NPP site under a limited construction licence issued by the Turkish Atomic Energy Agency (TAEK). Director General of the ROSATOM Alexey Likhachev, and First Deputy Minister of Energy and Mineral Resources of the Turkish Republic, Fatih Donmez, took part in the ceremony.

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