4 minute read 27 Aug 2021
Onshore land oil rig

What to expect as oil and gas companies navigate a post-pandemic world

By Mitch Fane

Americas Energy & Resources Leader and US Oil & Gas Leader

Transactions and energy leader; client-focused and sector-minded; broad experience across oil and gas, power and utilities, renewables and more.

4 minute read 27 Aug 2021
Related topics Oil and gas COVID-19

As industry economics improve, companies will give strong signals about the future with the capital expenditure decisions they make.

In brief

  • An EY analysis of US oil and gas reserves, production and ESG benchmarking documents the historic toll COVID-19 took on the industry.
  • As the industry rebounds in 2021, companies’ choices on capital spending will indicate how the companies – and investors – see their futures.   
  • ESG considerations are rising in importance, but the overall effect on reserves and production is still unclear.

In a year like no other, 2020 proved turbulent for oil and gas companies, with dramatic drops in oil prices, demand, revenues and capital expenditures and a significant increase in impairments. What lies ahead largely will be signaled by the level of enthusiasm capital markets exhibit for investing in the industry — and by the path companies choose for themselves through the investments they make. The 2021 EY US oil and gas reserves, production and ESG benchmarking study, which analyzes reserve and production information from the industry’s 50 largest publicly traded companies (based on year-end 2020 US oil and gas reserves) as well as environmental, social and governance (ESG) disclosures, documents the historic fallout and offers insights into likely trends.

Results were bleak across the board in 2020.

 Even as prices rise and economics improve, as they have so far in 2021, it is unclear how aggressively companies will be investing in the oilfield. A survey of companies at the end of 2020 projected US capital spending levels only slightly higher than the depressed levels of 2020. Plowback percentages already had been trending down for several years as capital markets began to shift their expectations about the US shale business from a growth mode to a return mode. Those trends translate to less production, which leads to shortages and higher prices. Higher oil prices, along with cost-cutting, have boosted earnings reports in 2021. Many of these companies have already started to reduce debt and set higher targets for dividends and share repurchases. Companies have three primary paths they can take with the extra cash generated in such an environment:

  • Return it to shareholders. This may be the route taken by some smaller independents that lack access to capital. 
  • Reinvest in the core business. Larger independents not actively looking to transition to alternative energy businesses may be more likely to exercise this option.
  • Invest in decarbonization and alternative energy. Integrated companies, several of which are European-based with stated net zero carbon goals, are much more inclined to follow this path.

The decisions oil and gas companies make in this regard are likely to color how they’re viewed by investors, and those views have important implications. Companies that go all in on reinvesting in the core business but fail to attract external capital will get a strong signal about where investors see the future of the industry. To date, upstream investment has shown no sign of returning to pre-pandemic levels. Scarce capital and growing demand may continue to push prices higher, though, offering attractive returns to those willing to continue to invest in the sector.

With ESG considerations increasingly factoring into investor decisions, companies face further pressures. For the first time, this year’s study incorporated ESG issues to highlight the industry’s growing focus on sustainability and nonfinancial goals.

With sustainability now an imperative, companies that are able to demonstrate a more acute focus on ESG matters will have an easier time attracting capital, employees and customers. The overall effect on reserves and production remains to be seen, however.

The chaos of 2020 largely has subsided in the industry. The most recent financial quarter has been a time of restoration, with earnings reports generally echoing the good news of the previous quarter. In the months ahead, capital raises, production expectations and companies’ crucial decisions on return of capital will do much to chart the course the individual players and the industry will take from here.

Summary

The 2021 EY US oil and gas reserves, production and ESG benchmarking study documents the historic fallout wrought by the COVID-19 pandemic and offers insights into likely trends.

About this article

By Mitch Fane

Americas Energy & Resources Leader and US Oil & Gas Leader

Transactions and energy leader; client-focused and sector-minded; broad experience across oil and gas, power and utilities, renewables and more.

Related topics Oil and gas COVID-19