4 minute read 18 Mar. 2022
Aerial view crude oil tanker

How oil and gas sector analysts’ view Q4 2021 earnings

By Andy Brogan

EY Parthenon Energy Sector Leader

Speaker and industry advocate, optimist, music addict and avid traveler.

Contributors
4 minute read 18 Mar. 2022

Oil, gas and LNG prices continued to rebound in the fourth quarter of 2021, and oil and gas companies’ earnings followed suit.

This article is a part of the Oil and Gas Quarterly Trends series.

In brief
  • Q4 2021 saw continued financial health for oil and gas companies. Recent events have changed the market landscape and time will tell how companies will respond.
  • Given the forecasts of underserved crude markets for the foreseeable future, analysts were interested in companies’ upstream capital expenditure plans.
  • Cost inflation was an area of questioning, and the effects of labor and material cost on returns were also focus areas.

2021 saw improvements for the oil and gas business. While the COVID-19 pandemic continued unabated, economies adapted and rebounded, and, as that happened, mobility and oil demand began to approach normal levels. Oil, gas and LNG prices topped pre-pandemic levels, and oil and gas company earnings followed. Although things look very different just a few short weeks after close and days after the final earnings call of the quarter, the fourth quarter of 2021 marked a continuation of that trend.

During the fourth quarter, Brent crude prices increased by 8% to an average US$80/bbl, the highest level in seven years. According to OPEC, global oil demand grew 2% between the third and fourth quarters as curbs on international travel and other restrictions on mobility were lifted. At the same time, relentless production discipline kept the market undersupplied and inventories falling. And recent events have moved the globe further toward undersupply.

In gas markets, warmer-than-normal weather in the US combined with recovering production interrupted the rally in Henry Hub prices, and they fell by 31%. In contrast, uncertain Russian supplies and stressed infrastructure drove prices in Europe to unprecedented levels. The continent went into the fourth quarter heating season with low inventory levels and nagging concerns about supply availability, and LNG prices increased by over 90%. Uncertainty has turned to reality and tightness in LNG markets will be with us for the foreseeable future. In refining, margins remained broadly flat compared with the previous quarter.

Earnings reports for the fourth quarter brought uniformly good news. Oil majors reported a combined net income of US$41.3 billion – more than double the US$17.3 billion reported in the previous quarter and a phenomenal turnaround from losses of US$25.8 billion in the fourth quarter of 2020. The majors reported combined cash flows of US$50.2 billion – 16% lower than the previous quarter but more than double year-ago levels.

As is almost always the case, questions about financial matters dominated earnings calls, accounting for nearly half of the total. The share of questions fell from 62% in the previous quarter, no doubt a result of strong financials. Healthy cash flows also explained analyst interest in shareholder distributions, and those questions accounted for 8% of the total. Analysts were focused on how payout ratios and the pace of share buyback plans might change in the event of stronger-than-expected commodity prices, earnings and cash flows. Analysts mused openly about what companies might do with even more free cash flow.

Given the expectation of tight crude markets for the foreseeable future, analysts were most interested in companies’ upstream capex plans, particularly for companies that had already announced spending increases. Analysts were keen to understand how incremental spend would be allocated between short- and long-cycle projects.

Not surprisingly at this time of year, analysts were curious about companies’ capital spending plans for 2022 and the range of possible outcomes. Analysts tried to gauge the amount of flexibility companies had built into the top end of the range of their guidance by asking how they would respond to continued high oil prices. Given the expectation of tight crude markets for the foreseeable future (an expectation that appears to be realized), analysts were most interested in companies’ upstream capex plans, particularly for companies that had already announced spending increases.

Given the uncertain long-term outlook for hydrocarbons, analysts were also keen to understand how incremental spend would be allocated between short- and long-cycle projects. Cost inflation was a key point, and the impact of labor and material cost on returns weighed heavily. On a related note, analysts probed to understand whether projected capex increases for 2022 were driven by higher activity levels or inflation. On trading, volatility in international gas markets led to questions about how much impact trading businesses had on companies’ bottom lines during the current quarter, whether those results were transitory and how trading businesses might perform in future quarters.

Top three themes Q4 2021

Decarbonization continued to remain the most important strategic theme. As the EU green taxonomy is implemented this year, it may begin to guide the environmental, social and governance (ESG) strategy of European investors, and analysts are interested in knowing how companies are likely to score. Companies’ response to current geopolitical tensions have highlighted investor focus on non-economic factors. Additionally, analysts pushed for more disclosure of carbon intensity at the asset or region level to get a view of the relationship between asset returns and emissions, particularly for projects not meeting industry benchmarks.

On mergers and acquisitions, analysts checked for companies’ appetite to acquire renewable energy companies vs. organic growth, perhaps reflecting eagerness for companies to grow those businesses and to understand their capacity to build them from scratch. In parallel, analysts also wanted to know companies’ willingness to go beyond the asset disposal plans already announced if high commodity prices are reflected in valuations. On the subject of commodity prices, analysts were, as always, keen to get companies’ views.

The production outlook for 2022 emerged as the most important operational theme. Analysts were curious if higher production levels in 2022 would be driven by higher activity levels or more efficient operations. It is unclear how much flexibility companies might have in the short run, but it is likely that long-term investment and production plans are already being reworked in light of recent events. Reflecting a consensus that gas markets have more long-term upside, they probed to understand the mix of production growth between oil and gas. With high and volatile gas prices, questions naturally arose about companies’ strategies for entering into long-term contracts or staying in the spot market. As always, analysts also checked for updates on companies’ major projects and the level of maintenance activity expected in 2022.

Looking forward

Oil and gas markets are facing continued volatility in the face of geopolitical risk and lean inventories. Upside risks that were present at the end of Q4 have already been realized, turmoil has accelerated, and expectations have never been more in flux. In light of all of the uncertainty, allocation of cash between legacy businesses, alternatives, dividends, and buybacks, return on capital and progress on decarbonization will continue to be a focal point.

  • Scope, limitations and methodology

    The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q4 2021 earnings reporting season among 11 global oil and gas companies. The identification of the top three themes is based solely on an examination of the transcripts of the earnings conference calls. For this analysis, the following companies were included:

    • BP plc
    • Chevron Corporation
    • ConocoPhillips
    • Eni SpA
    • Equinor ASA
    • Exxon Mobil Corporation
    • Repsol SA
    • Royal Dutch Shell plc
    • Suncor Energy Inc
    • TotalEnergies SE
    • Woodside Petroleum

Summary

Oil and gas markets are facing continued volatility in the face of geopolitical risks and lean inventories. Questions remain about the longer-term prospects for hydrocarbons, and allocation of cash between legacy businesses, alternatives, dividends and buybacks, return on capital and progress on decarbonization will continue to remain focus areas for investors.

About this article

By Andy Brogan

EY Parthenon Energy Sector Leader

Speaker and industry advocate, optimist, music addict and avid traveler.

Contributors