E&P Cash Surge Could Mean Return to Super Profits

E&P Cash Surge Could Mean Return to Super Profits
A healthy amount of free cash flow among the world's public E&P companies could signal the return to super profits, according to Rystad Energy.

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

“The fact that E&P companies are able to deliver the same shareholder returns despite much lower oil prices points to an impressive increase in profitability,” Rystad’s head of upstream research Espen Erlingsen said.

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.”

So who really benefits?

According to Rystad – who analyzed recent cash flow statements from all the majors plus Norway’s Equinor – there’s a clear winner.

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


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Jason  |  April 06, 2019
While it sounds like good news, the boost in free cash is not from increased productivity but reduced spending and this will have an effect down the line, as this industry is a treadmill where you have to keep investing to discover new reserves and increase spending on costlier technology to milk depleting reserves and declining productivity rates of wells which are now producing more in their earlier stages and hence see shorter life-cycles. Unless E&P plow back those profits into regenerating growth, this drought of capex is sowing the seeds of a hydrocarbon famine. The shifting balance of countries which are now net importers also marks a major shift in demand volumes as much as it is driven by the reason for that demand, which is more end-user consumer driven (mainly transport) rather than the manufacturing sector where growth is slow or stagnant and economies shift towards the more lucrative services & IT sectors. If the reinvestment in O&G remains low or slow and is a reactive impulse to oil prices, then we are not out of the woods yet. OFS companies in O&G have yet to claw back survival discounts given during the crisis and dealing with depleted inventories, cannibalizing for spares and personnel attrition swelling to an exodus with fewer having the appetite to return to the uncertainty of a volatile cyclical industry.