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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q2 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
  • "With continued market shifts from oil price softness, many companies are finding acquisitions increasingly appealing to broaden their portfolio risk and seek improved returns on invested capital. It’s a terrific time and opportunity for companies to strategically optimize their portfolios with new assets and talent, whether it’s expansion of their capabilities and offerings, or expansion into new markets and geographies."

    — Kent Kaufield, EY Energy Market Segment Leader — Canada

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 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, debt repayment or reinvestment, and returns to investors through capital investment
  • The conditions that would be required to trigger the removal of scrip dividend programs and the anticipated timeframe for removal
  • The factors that would trigger the resumption of share buyback programs and the potential size of such programs
  • "The shale resource scale makes adding incremental reserve positions far less important than 10 years ago. With capital markets nowcomparing oil and gas to manufacturing sectors, the ability to generate accretive cash flow and pay investors through dividends andequity growth is critical and is best accomplished through operating excellence. Capital markets will invest where the risk-return profile is most attractive, forcing oil and gas players to reshape their investment and operating strategies."

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

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 level of production associated with a given number of active rigs in the US onshore
  • The impact of asset divestments or new project start-ups on planned production levels
  • Production levels relative to guidance and reasons for any significant deviations
  • The production volumes that may be lost due to scheduled maintenance and turnaround activity

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 assets within the portfolio that are considered core or non-core
  • Appetite for selective bolt-on acquisitions to high-grade portfolios
  • The attractiveness of entry into specific new geographies or plays
  • The extent of the pivot to shorter cycle time, high-return investments
  • Where companies are seeing the greatest value for potential acquisitions
  • "Portfolio optimization still remains at the top of executives’ lists. We see a strong appetite for new market and geographic expansion. Operating business model changes across the industry resulting from a lower oil price environment are impacting portfolio and strategic planning decisions at a board level in an unprecedented manner."

    — Sanjeev Gupta, EY Energy Market Segment Leader — ASEAN

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 relative economics of major projects in the pipeline
  • 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
  • Progress on government and partner discussions regarding project development plans
  • "Major projects remain an important topic for most oil and gas players. As a degree of confidence, or acceptance over oil prices emerges in the market, investment into projects is once again being considered. Now however, greater levels of scrutiny are being placed on project teams who are under pressure to reduce the cost of proposed projects and critically, to improve delivery performance to targets."

    — Chris Pateman-Jones, Director, Capital 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 level of oil or gas price required to be cash flow breakeven
  • 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 from the start-up of major new projects

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
  • Indications of cost inflation due to increased activity levels in the US onshore
  • Observations on the variation in operating costs across different US shale plays

Tax position

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

Policy and regulation1

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

  • The impact of the diplomatic rift between Qatar and some of its regional neighbors on companies’ operations in the country
  • The potential impact of new US sanctions imposed on Russia on companies’ activities in the country and partnerships with Russian oil and gas companies
  • The impact any restrictions on gas exports from Australia introduced by the government would likely have on the country’s liquefied natural gas (LNG) plant operators

1 Resurfacing trend theme from Q4 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

Overview of Q2 2017 themes

Capital spending guidance retained the top spot in the ranking for a second consecutive quarter. The earnings calls took place against a backdrop of weaker oil prices. This prompted questions on the flexibility companies have to scale back their capital investment if oil prices languish below US$50/bbl. Capital efficiency improvements and portfolio actions have strengthened the flexibility many companies now have. The pivot to shorter cycle time investments provides greater flexibility around capital allocation. Some companies will have smaller capital commitments, or more discretionary capital at their disposal, as major projects sanctioned prior to the downturn start up.

The companies we track typically reported stronger cash flow generation over the second quarter due to production from new project start-ups and lower costs. Companies are weighing the priorities for cash–capital investment, debt repayment or shareholder pay-outs. Shareholder distributions was the biggest mover during the second quarter, rising up to second position in the ranking. Questions centered on whether companies would consider reinstating a full cash dividend or possibly buying back some scrip shares. But decisions on these issues are likely to be kicked further down the road until oil prices stabilize.

Companies reported stronger cash flow generation supported by lower costs and the start-up of new projects. Shareholder returns remain a priority for cash, but an oil price recovery is proving elusive. Decisions on removal of scrip programs will be delayed until companies are comfortable they can cover capital spending and dividends through cash from operations for an indefinite period of low prices.

Production outlook was also a big mover, rising from seventh to third place. Analysts are still trying to get a grasp of the production growth associated with rising rig counts and productivity gains in the US onshore. But have US shale producers missed the mark? The growth in output has delayed oil supply and demand moving into equilibrium. Oil prices have reversed all of the gains that immediately followed the OPEC deal. The light some shale producers saw at the end of the tunnel may simply have been a train coming the other way.

Cost control as a theme slipped down to seventh place in the ranking. This doesn’t mean companies’ focus on costs have relented. If anything, with oil prices widely expected to stay low indefinitely, the focus has intensified. It rather reflects the greater confidencethe investment community has in the sustainability of cost reductions achieved to date. Technology has played a major role in structurally shifting the cost base lower. Technology has not only disrupted the oil price, it has disrupted the industry’s cost base,too. US$40/bbl has become the new US$50/bbl in terms of targeted breakeven prices.

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 quarterly 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 21 July to 1 August 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