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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q1 2017

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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 two-three years
  • Whether the level of planned capital investment is sufficient to sustain production growth longer term or replenish the portfolio
  • The flexibility to raise capital expenditure if oil prices rebound or lower it if oil prices remain under pressure
  • Whether the reduction in capital spend reflects lower activity, improved capital efficiency, deferrals or cost deflation in services and equipment
  • The impact of portfolio actions on planned capital spending levels
  • "While many global producers are reducing or leveling expenditures, US shale capital spending has increased precipitously — especially in the Permian Basin. Many drillers are leveraging cash and hedges from a short rise in oil prices to ramp up production. More drilling activity, coupled with growing oilfield services costs, is driving capital spending higher."

    — Deborah Byers, EY Energy Market Segment Leader — Southwest Region

Portfolio optimization

This theme relates to questions on progress towards targets for disposals or acquisitions and 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:

  • Scope for additional asset sales beyond those previously announced
  • Appetite for selective bolt-on acquisitions or large-scale M&A, as the market may have bottomed
  • The attractiveness of entry into specific new geographies or plays
  • Potential opportunities to form partnerships or JVs for strategic investments
  • Where companies are seeing the greatest value for potential acquisitions

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
  • Whether pockets of industry service cost pressure may emerge due to increased activity levels
  • The deflationary impacts of improving productivity and efficiency outside of the US

Major project updates

This theme relates to the execution of major projects and the pipeline of capital projects. Key issues raised on major projects include:

  • The key risks to major project delivery and steps taken to mitigate them
  • 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 oil price required for new projects to be sanctioned

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 sensitivity of cash flow to movements in oil and gas prices
  • The priorities for the use of excess cash flow if oil prices turn out to be higher than planned
  • The impact of asset divestments on future cash flows
  • The contribution to cash flow of major new project start-ups

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 factors that would trigger the resumption of share buyback programs and the potential size of such programs
  • The ability to raise the dividend if there is a sustained oil price recovery and whether that is a priority
  • The priorities for cash – shareholder pay-outs or reinvestment and returns to investors through growth
  • The conditions that would be required to trigger the removal of scrip dividend programs and the anticipated timeframe for removal

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 split in the production mix between liquids and gas going forward
  • The breakdown of the elements that contribute to production guidance figures
  • Production levels relative to guidance and reasons for any significant deviations

Tax position1

This theme relates to expected tax rates and costs and also government fiscal policies. Key issues raised on tax include:

  • Guidance on underlying tax rates for the remainder of the year at a given oil price
  • The potential implications of fiscal policy changes and tax rulings in particular countries
  • Whether tax rates have structurally changed due to portfolio optimization actions
  • "Governments of oil and gas producing countries need to monitor tax structures and revise them accordingly to stay competitive, particularly as some major producing countries have made important adjustments to attract capital. Maintaining investment and interest in oil and gas investment in any particular country, requires a clear fiscal policy and a tax regime providing competitive returns to investors."

    — Alexey Kondrashov, EY Global Oil & Gas Tax Leader

    1 Resurfacing trend theme from Q2, 2016

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
  • "To optimize returns and manage downside risk, E&P operators are prioritizing North American exploration in areas with advantaged “stacked pay” geology, linked to midstream infrastructure that provides more options and access to globally competitive downstream refineries and chemical plants. Robust equity and debt markets that understand source rock resources coupled with reliable fiscal regimes make Canada and the US even more attractive."

    — Vance Scott, EY Americas Oil & Gas Leader in Transaction Advisory Services

Refining margins2

This theme relates to the profitability of the refining segment. Key issues raised on refining margins include:

  • The global supply and demand of refined products and the margin outlook
  • The impact on the light/heavy oil differentials on refining profitability
  • The margins generated by of a company’s refining portfolio relative to the performance of peers

2 Resurfacing trend theme from Q1, 2016

Overview of Q1 2017 themes

Capital spending guidance rose to top place in the ranking in the first quarter. Some companies reported capital spending coming in below earlier guidance for the quarter due to efficiencies and some phasing of investment. Companies remain cautious in their capital spending plans for the remainder of 2017 despite posting strong earnings growth. The initial optimism that followed the November agreement by OPEC and other large producers to cut output has dissipated. US tight oil output growth is pushing back the point at which the market may move into a more balanced position.

Portfolio optimization remained in second place of themes this quarter. Companies are continuing to focus their portfolios around core positions that structurally shift their cost base lower. There has been a wave of divestments in Canada’s oil sands bythe majors. As a result, oil sands ownership has become increasingly concentrated in a subset of companies that are uniquely able to more efficiently develop that resource.

The theme of cost control moved up from sixth to third place. Analysts are concerned that higher activity levels in the US onshore will result in cost pressures. However, most companies have been successful in capturing efficiencies and should be able to offset inflation in the cost of goods or services. Internationally, costs still have some way to fall before the bottom of the deflationary cycle is reached.

Companies remain cautious despite reporting some expectation-busting earnings. The initial optimism that followed OPEC’s decision to cut output has waned. OPEC has agreed to extend the cuts to March 2018 but this may just give the green light for shale producers to pump more. The industry isn’t staking its near-term future on a strong price recovery.

Cash flow targets as a theme climbed to the fifth. Stronger cash flow generation in the first quarter turned the focus to full-year guidance. A number of companies have major projects, sanctioned before the downturn, coming on-stream in the next 12 months. These projects are expected to become significant contributors to operating cash flow as they ramp up.

Exploration strategy was a new theme this quarter, debuting in ninth place. Exploration budgets have been slashed, as discretionary spend was one of the first areas to be cut in the wake of the oil price collapse. Global oil discoveries fell to a record low in 2016 according to the International Energy Agency (IEA). There are some signs though that companies are beginning to look to exploration to replenish their portfolios and the pipeline of prospects.

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

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 Q1 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 20 April to 10 May 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