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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q4 2016

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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:

  • Guidance on the projected US shale production for a given planned number of rigs
  • The likelihood of US shale production being higher than the target range for the planned capex due to productivity improvements
  • Clarification on the underlying production decline rates
  • The status of producing assets in countries where there are security issues
  • The equity production volumes impacted by OPEC’s agreement to cut output
  • The breakdown of the elements that contribute to production guidance figures
  • The impact of new project start-ups on production volumes

"Shale changes the game. Because of its abundance, the number of economically rational operators involved, its short development cycle and its ability to deliver returns quickly, US shale will likely represent the marginal barrel of production, at least in the medium term."

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

Portfolio optimization

This theme relates to questions on progress toward 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
  • The ability to achieve disposal targets with the large volume of assets on the market
  • Parts of the business that disposals are likely to come from
  • 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
  • The balance in the portfolio between short-cycle and long-cycle assets
  • The opportunities for deal activity in US unconventional plays
  • Whether there is a strategic preference for more oil or gas

"As transaction activity increases, 'transaction excellence' will be key. This includes a more focused understanding of transaction priorities and pursuing the right deals for the right reasons, finding the right capital structure to match the risk of an investment and bringing a more rigorous focus and discipline in transaction execution."

— Andy Brogan, EY Global Oil & Gas Transactions Advisory Services Leader

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:

  • Whether the lower planned level of capital spending for 2017 represents a new sustainable level
  • Projections of capital spending in the medium- to long-term
  • 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 the oil price recovery is sustained
  • 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
  • Reasons for capex trending above/below guidance and any changes to full-year targets

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 specific processes that have been adopted to improve project delivery capability
  • Whether final investment decisions are expected on any major projects in the short-term
  • Opportunities to accelerate some projects to take advantage of deflation in oilfield service costs
  • Updates on the status (cost and schedule) of planned new project start-ups
  • The oil price required for new projects to be sanctioned

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 need to be satisfied to trigger the removal of scrip dividend programs and the anticipated time frame for removal

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 level of confidence in the projected costs of pre-FID projects

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 oil price that is required to balance sources and uses of cash and the sensitivities to lower or higher prices
  • The ability to cover capital expenditure commitments and shareholder returns from cash flows in 2017
  • 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

LNG market developments

This theme relates to LNG project performance and the outlook for supply, demand, contracting activity and pricing. Key issues raised on LNG market developments include:

  • Whether, due to the weaker demand from traditional importing nations in Asia, new export markets are being targeted
  • Buyers’ willingness to sign up to new supply contracts as older long-term agreements expire
  • The strategies companies are pursuing, or considering, to create new markets for LNG
  • The terms on which uncommitted volumes are being sold

Policy and regulation

This theme relates to the impact on the oil and gas industry of proposed new policies or regulations. Key issues raised on policy and regulation include:

  • The potential impact of the proposed US border tax adjustment on global oil trade and US refiners reliant on imported crude
  • Whether prospective changes to US economic and energy policy would impact decisions on project approvals
  • The potential impact of the review of Australia’s Petroleum Resource Rent Tax (PRRT) on future investment in the country

Country risk

This theme relates to the operational risks arising from political or economic instability, social unrest or the security situation in a particular country. Key issues raised on country risk include:

  • Observations of the overall exposure to a country where there is a perceived high risk of doing business
  • The potential threat to overseas projects if the host country is not able to meet its share of financial commitments
  • The impact on production volumes of the security situation in a country

Overview of Q4 2016 themes

The agenda for the fourth-quarter results season centered on the response of US shale producers to higher prices. US onshore activity has sparked back into life. Capital is being selectively redeployed. Productivity improvements mean that US supply could recover quickly, perhaps more quickly than many, OPEC included, expected. However, there is some uncertainty on the production growth trajectory because this is the first recovery the US shale industry has experienced. The theme of outlook moved up to top spot in the rankings. Production targets are back in vogue.

A further uncertainty relates to the sustainability of the upturn in US onshore activity. Some rigs were permanently retired during the downturn and skilled staff exited the industry. There are some early signs that pockets of cost pressure are developing. Cost control remains one of the top 10 industry themes. Standardisation and simplification were the watchwords in comments about sustainable cost reduction. Increasingly, cost control and standardization initiatives are being complemented by more widespread digitalization of business processes.

US onshore activity has sparked back into life. This is the first recovery the shale industry has lived through. The environment now is one of lower costs and higher productivity than before the downturn. This raises questions over the outlook for capital efficiency, deal flow and production growth in this recovering but changed market.

Ranked in second position, optimization was a key theme for the quarter. Our annual transactions review showed deals in the fourth quarter accounted for 43% of the total value of all oil and gas deals in 2016. The spotlight was again on US unconventional plays where deal activity has been gathering pace. Independent shale producers with a focus in one major basin have typically outperformed those with more distributed assets. This may eventually lead some companies to consider selling or swapping assets to streamline their operations. Having some exposure to US shale creates capital flexibility within the financial framework. Capital spending guidance remained among the top three themes for a fifth straight quarter.

Two new themes entered the top 10 ranking in the fourth quarter. Policy and regulation was a topical theme following the election of President Trump. It is widely thought that the new administration will be broadly supportive of the oil and gas industry, although policy specifics are yet to emerge. Challenges to prevailing political, social and economic beliefs are heightening risk in some countries. This is reflected in risk emerging as a new theme, entering the ranking in tenth place.

— 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 Q4 2016 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 31 January to 1 March 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