O&G Industry Not Immune to Economic Struggles - Study
Ernst & Young's US E&P benchmark study found that the oil and gas industry was not immune to the global economic struggles of 2009. While the industry realized a 7% increase in combined oil and gas production, revenues were down 36% and after-tax profit was down 97%. At the same time, costs, which had risen to unprecedented heights over the previous five years, finally relented.
"From this study, we see many companies working very hard through difficult economic circumstances and making necessary spending cuts to return value for shareholders," said Marcela Donadio, Ernst & Young LLP, Americas Oil and Gas Leader. "Aside from major changes in energy regulations, we see the realignment of costs as a very positive indication of opportunity for increased exploration and production activity in the coming years."
The benchmark study is a compilation and analysis of publicly available information for the top 50 exploration and production (E&P) companies' US operations. These 50 companies account for approximately 85% of total US oil reserves and approximately 64% of gas reserves. For 2005 – 2009, Ernst & Young examined E&P trends surrounding spending, revenues, reserves and performance measures for three groups of companies – integrateds, independents and large independents. On December 31, 2008, the Securities and Exchange Commission (SEC) issued a final rule to modernize and update the oil and gas reserve disclosure requirements. Therefore, some 2009 oil and gas reserve information is not comparable to prior years.
Revenues and results of operations
Revenues from exploration and production decreased 36% from $190.2 billion in 2008 to $122.3 billion in 2009. This decline in revenues was driven by lower commodity prices as combined oil and gas production increased 7% in 2009.
Production costs, which had reached unprecedented highs by mid-2008, declined 22% in 2009 to $36 billion. This is the first decrease the industry has seen in the five-year period studied. Production costs were $46 billion in 2008.
After-tax profits dropped to $1.3 billion in 2009, a 97% decrease from $40.6 billion in 2008. The integrateds posted after-tax profits of $11.5 billion, while the large independents and independents had losses of $4.2 billion and $6.0 billion, respectively.
The 50 companies included in the study experienced a 5% increase in US oil reserves, from 15.5 billion barrels in 2008 to 16.2 billion barrels in 2009. The increase is attributable primarily to field extensions and discoveries, which increased 18% over 2008 rates to 924.3 million barrels, and positive revisions of 923.3 million barrels in 2009. Oil production showed a 10% increase from 1.2 billion barrels in 2008 to 1.3 billion barrels in 2009.
The unconventional gas boom continues, despite lower commodity prices. It has contributed significantly to gas reserve growth. End of year gas reserves were 156.6 Trillion cubic feet (Tcf) in 2009, representing 4% growth from 2008 and 40% growth over 2005. Gas production rose 6% in 2009 to 11.9 Tcf and has shown 38% growth since 2005.
Upstream spending was cut nearly in half in 2009. Total expenditures, including proved and unproved property acquisitions, fell 47% to $73.4 billion in 2009 from $139.8 billion in 2008 as companies sought to rein in spending and weather the economic storm.
Seven companies increased their combined exploration and development spending in 2009 – Comstock Resources, Concho Resources, EQT, ExxonMobil, Petrohawk Energy, Plains Exploration & Production and Royal Dutch Shell.
The 50 companies' plowback percentage (total capital expenditures as a percentage of netback or revenues less production costs) decreased in 2009 to 85%. Plowback percentages peaked at 122% in 2006 as a result of an increase of investment activity driven by a relatively high priced commodity environment. The lowest plowback average of the five-year-span studied was 68% in 2005 as oil demand and energy prices grew, and spending lagged.
"Eight-five percent is still remarkably strong when you look at the revenue lost," said Donadio. "Yes, adjustments were made to preserve liquidity. And this overall decrease in reinvestment will likely impact supply over time, but it is fair to say that the industry worked hard through recent economic struggles to maintain people and production."
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