U.S. DRILLING IS BETTER: 3Q $5BLN
According to a review of financial statements released in recent weeks and despite lower crude oil prices, companies drilling in North American tight oil formations recorded improved financial results in third-quarter 2014 as compared with third-quarter 2013 (Figure 1). The recent financial statements for a group of 30 publicly traded companies suggest that improved operational efficiency, asset sales, and increases in the value of the companies' hedging instruments contributed to better financial results despite front month West Texas Intermediate (WTI) crude oil prices averaging $97.24 per barrel (bbl) in the third quarter of 2014, $8.56/bbl lower than third-quarter 2013.
Net income for the 30 companies more than doubled, increasing by $3.6 billion to $5.0 billion. Liquids production, which totaled 1.8 million barrels per day (bbl/d), was 338,000 bbl/d higher in third quarter 2014 than in third-quarter 2013. In addition, and consistent with prior-period trends, these companies were able to increase their profitability by controlling costs even while increasing production, as reflected in the lower ratio of operating expenses to revenue. The combination of these factors contributed to the highest return on investors' equity for any quarter in three years.
There were some areas where company performance lagged previous results. Third-quarter 2014 asset impairments totaled almost $1.1 billion–higher than in the third-quarter 2013 and the highest level so far in 2014. Impairments occur when a company writes down the value of properties to reflect a lower current market value. Impairments occur when properties lose production potential or become uneconomic because of energy price declines. Not only were absolute WTI prices lower than third-quarter 2013, but the prices of other U.S. crude oils such as WTI Midland and Bakken, which are prices some of these producers receive, were more discounted to WTI than in the previous year.
This group of companies, while profitable, still spent more on capital expenditures than they generated from operations. In previous quarters, they met most of the cash shortfall through capital markets, raising debt or equity, to pay for investment. In the third quarter, the shortfall was met through sales of property or other lines of business, with sales totaling $4.5 billion, the highest level for any quarter in the past five years. Some sales were of non-core assets; e.g., natural gas utility business, suggesting that through the sales companies are increasing focus on upstream exploration and production. Cash from these sales helped pay for investment, which contributed to a substantially lower net increase in debt as compared with the previous two years.
Some producers may also have chosen to protect themselves from declining crude prices by hedging, which includes buying or selling futures, options, or swaps contracts. Hedging allows a company to protect its future oil production against downward price movements. When the value of hedging contracts increases, it offsets reduced revenue from future oil production due to lower prices. For this group of companies, the value of hedging contracts increased in the third quarter, resulting in an unrealized gain of nearly $4.1 billion (Figure 2) on previously purchased hedging contracts and the value of hedges purchased in the quarter. Hedging asset value had declined in late 2013 because oil price volatility was low and prices rose amid global supply outages. In third-quarter 2014, however, crude prices declined because of growing supply and uncertainty about future demand, and, as a result, hedging asset value increased as compared with prior quarters.
The largest gain in the value of hedging contracts occurred in hedges on production within the next year. Details on specific hedging techniques used by these companies are difficult to obtain; however, a potential reason for the large gain in value for hedges on production in the next year may be that near-term crude oil futures contracts respond more to new information, whereas longer-dated futures contracts exhibit less price volatility. From June 30 to September 30, the December 2015 WTI futures contract price decreased by $7.56/bbl, less than the decline in futures contracts for WTI crude oil delivery in December 2014 and June 2015.
Although hedges provide protection from adverse price movements, prolonged periods of lower prices could nonetheless exert financial pressure on some of these companies, particularly companies with higher costs or higher debt. For the fourth quarter so far, front month WTI prices have averaged $81.01/bbl. Additional information on the financial performance of oil and gas companies can be found in EIA's Quarterly Financial Review.
GASOLINE AND DIESEL FUEL PRICES DECREASE
The U.S. average price for regular gasoline decreased seven cents from the prior week to $2.82 per gallon as of November 24, 2014, 47 cents lower than the same time last year. The Midwest price fell nine cents to $2.76 per gallon. The Gulf Coast and Rocky Mountain prices decreased eight cents, to $2.59 per gallon and $2.93 per gallon, respectively. The West Coast price was down seven cents to $3.05 per gallon. The East Coast price decreased five cents to $2.85 per gallon.
The U.S. average price for diesel fuel decreased three cents to $3.63 per gallon, down 22 cents from the same time last year. The Midwest and West Coast prices declined four cents, to $3.74 per gallon and $3.72 per gallon, respectively. The Gulf Coast and Rocky Mountain prices decreased three cents, to $3.51 per gallon and $3.74 per gallon, respectively. The East Coast price decreased two cents to $3.52 per gallon.
PROPANE INVENTORIES FALL
U.S. propane stocks fell 2.0 million barrels last week to 79.2 million barrels as of November 21, 2014, 22.3 million barrels (39.1%) higher than a year ago. Gulf Coast inventories decreased by 1.4 million barrels and Midwest inventories decreased by 0.5 million barrels. East Coast inventories decreased by 0.1 million barrels while Rocky Mountain/West Coast inventories remained unchanged. Propylene non-fuel-use inventories represented 3.9% of total propane inventories.
RESIDENTIAL HEATING OIL PRICE DECREASES, RESIDENTIAL PROPANE PRICE UNCHANGED
As of November 24, 2014, residential heating oil prices averaged $3.36 per gallon, 2 cents per gallon lower than last week, and about 53 cents less than last year's price for the same week. Wholesale heating oil prices averaged nearly $2.58 per gallon, almost 3 cents per gallon lower than last week and 57 cents lower when compared to the same time last year.
Residential propane prices were virtually unchanged at $2.41 per gallon, nearly 14 cents per gallon less than the price at the same time last year. Wholesale propane prices averaged 93 cents per gallon, over 7 cents less than last week's price and almost 50 cents per gallon lower than the November 25, 2013 price.
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