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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q2 2018

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Cash flow targets

Balance between sources and uses of cash

  • Why higher oil prices are failing to translate into proportionate increases in free cash flow
  • Whether excess cash flow will be used to reduce debt and lower gearing
  • Possibilities for higher dividend payouts or increased share buybacks in light of stronger cash flows
  • Whether cash flow targets will continue to remain important as against revenue targets
  • Changes in baseline oil price realization assumptions and resulting changes in cash flow guidance
  • “Healthier cash flows were short of investor expectations, as taxes capped gains expected from higher crude prices. Expectations are building, however, on possible use of excess cash toward higher capital investments. Producers have signaled that they will continue to prioritize cash flow over revenue growth, while shareholder distribution and debt servicing are top of mind as the impact of higher crude prices takes effect and the cash flow situation becomes clearer.”

    — Jeff Williams, EY Global Oil & Gas Advisory Leader

Major project updates

The execution of current projects and the pipeline of future projects

  • Whether final investment decisions are expected on major projects in the short term
  • Updates on the status (cost and schedule) of planned new project startups
  • When major projects under development are likely to begin contributing to cash flow
  • Response to partner comments relating to progress with major projects
  • Milestones that need to be achieved for projects to move toward the final investment decision (FID)
  • Steps taken to remove bottlenecks and improve efficiency and utilization of specific projects

Capital spending guidance

Companies’ flexibility to ramp up or down their capital expenditure in response to market conditions

  • Will higher-than-expected oil prices drive higher capital spending levels?
  • How buybacks and debt commitments could affect spending levels
  • Targets for return on capital and plans to achieve those targets
  • Whether higher planned capital spending is the result of inflation or efficiency gains
  • Reasons for capex trending above or below guidance and any changes to full year targets
  • Early indications of the potential range for capital spending for the next two to three years

Production outlook

Targeted production levels and factors that may impact a company’s ability to increase production

  • Plans and targets for production of unconventional resources, especially US shale
  • Factors leading to a decrease or increase in production volumes during the first half of the year and the level of uncertainty in the production guidance
  • Utilization and prioritization of assets to achieve production targets and the availability of capacity to increase output
  • Reasons why production may be at the lower or upper end of the guidance range in the next year
  • The contribution of recent major project start-ups and acquisitions to production

Portfolio optimization

The appetite for asset sales or purchases including observations on the state of M&A markets issues of portfolio balance and exposure to particular asset classes

  • Have companies reset their asset disposal targets following the completion of major divestment programs
  • The assets within the portfolio that are considered core or non-core
  • Appetite and capacity for opportunistic bolt-on acquisitions and possible areas of value-creating assets
  • How recent acquisitions fit into the portfolio and their effect on the pace of divestments
  • How market conditions might lead to more deal activity (specifically in gas and LNG)
  • How potential acquisitions compare to the organic investment options
  • "We will see more in the way of deal value over volume, as producers look to build further optionality into portfolios to stimulate long-term growth and potential business transformation. Supplementing core assets with acquisitions and divesting non-core assets will continue. Recent prominent deals reflect producers’ desire to buy as well as build, while US shale growth will attract interest as major producers seek to consolidate exposure in the Permian."

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

Shareholder distributions

Companies’ strategy for returning capital to shareholders, changes to that strategy and potential risks to delivery

  • Reasons for an increase or decrease in shareholder distribution targets
  • The potential to raise dividend due to stronger cash flows and balance sheets
  • How buybacks would be tied to asset disposal programs
  • The priorities for cash – shareholder pay outs, debt repayment or reinvestment, and return to investors through capital investment
  • The factors that would trigger the resumption of share buyback programs and the potential size of such programs

Cost control

Actions companies have taken to reduce costs, and trends in the cost of equipment and services

  • Reasons for higher costs
  • The scope for further reductions in operating costs compared with previous guidance
  • Initiatives that have enabled reductions in operating costs
  • The impact of maintenance activities on unit costs
  • Guidance on the level of operating costs going forward and supply chain areas most prone to inflation

Downstream performance

Investment and returns in the refining and marketing segments

  • Impact of higher crude oil prices on the marketing business
  • Prospects for the gas retail business
  • Factors leading to lower-than-expected results of the downstream business and efforts in place to improve them

Refining performance

Profitability of the refining segment

  • Factors shaping refining margins and the short-term margin outlook
  • Possible impact on product yield and margins due to IMO 2020
  • How upcoming maintenance plans will impact output this year

LNG market developments

LNG project performance and the outlook for supply, demand, contracting activity and pricing

  • Prospects for continued high demand from Asia, especially China, and reaction to softness in demand from Europe
  • Possible sanctions of new projects in response to a potential supply gap opening up in the market over the next two to three years
  • The nature and extent of headwinds to the LNG business
  • Buyers’ demand for new supply contracts as existing long-term agreements expire
  • "Asia is now widely considered as the growth driver for the LNG market. Chinese imports will increase as the shift from coal to gas accelerates. And demand is spiking in countries such as India and Pakistan, as well as more established buyers like Japan and Korea. After years of oversupply, a shortfall is on the horizon, which could make the case for brownfield expansions and new projects. Producers who move early will hold the upper-hand."

    — Sanjeev Gupta, EY Energy Market Segment Leader – ASEAN

Overview of Q2 2018 themes

  • Most companies reported strong earnings growth in the second quarter, but investors were disappointed. Expectations had risen in line with oil prices and profits, but cash flow generation of some companies fell short of consensus estimates. Production growth also underwhelmed in some cases as the lack of spending and divestments during the downturn began to bite. Cash flow targets emerged as the top theme in Q2 2018. Unsurprisingly, analysts were keen to understand the priorities for excess cash. Companies appear to be shifting their focus on capital discipline for now, opting instead to return cash to shareholders and pay down debt.
  • Higher crude prices prompted questions on refining performance and downstream performance, both of which re-entered the top 10 themes. Refining and retail margins for most companies were in the spotlight, as were the strategies being considered to protect profitability. Downstream was the leading profit generator during the period of lower oil prices, especially for integrated IOCs, and will continue to feature heavily in capital allocation.
  • LNG market developments featured among the top 10 themes for the first time since the fourth quarter of 2016. Since then, just two LNG projects reached final investment decision. Eighteen projects were delayed or cancelled. However, the market sentiment around LNG has quickly shifted from oversupply to impending shortfall. Some LNG developers see a window of opportunity to sanction new projects or brownfield expansions. There will be an early mover advantage because the volume of planned but unsanctioned capacity additions far exceed even the most optimistic LNG demand outlooks.
  • After a sustained period of capital discipline, and focus on value creation, investors are concerned the pendulum could swing back to volume growth. Greater confidence that “lower for longer” doesn’t mean lower forever could prompt a change in investment strategy. The theme of capital spending guidance moved up the ranking as companies reiterated a commitment toward their previously declared capital expenditure levels, despite higher cash flows. Inflationary pressure is an upcoming story, especially in the US lower 48, keeping efficiency improvement efforts in focus.

  • Despite capital constraints, and preference for smaller projects with faster payback, continued interest was shown in operational and regulatory updates on capital projects, helping the major project updates theme retain the second spot this quarter.

Healthy quarterly earnings still left some investors disappointed. Lower production and higher costs for some operators offset higher oil prices. Companies are holding firm on capital spending limits but are expected to build more optionality into their portfolios and set themselves up for future growth or business transformation. LNG may come into play again if the brakes are removed from project sanctions.

Adi Karev,
EY Global Sector Leader, Oil & Gas

EY contacts

Adi Karev
EY Global Oil & Gas Leader
+852 2629 1738

Derek Leith
EY Global Oil & Gas Tax Leader
+44 12 2465 3246

Andy Brogan
EY Global Oil & Gas Transactions Leader
+44 20 7951 7009

Gary Donald
EY Global Oil & Gas Assurance Leader
+44 20 7951 7518

Jeff Williams
EY Global Oil & Gas Advisory Leader
+1 713 750 5916

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 Q2 2018 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 2018.

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
  • Equinor ASA
  • Suncor Energy Inc
  • TOTAL S.A.
  • Woodside Petroleum Ltd