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Top 10 analyst themes
from quarterly oil and gas earnings calls

Q4 2017

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Portfolio optimization

This theme relates to questions on 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:

  • Whether companies have reset their asset sales 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
  • The extent of the pivot to shorter cycle time, high-return investments
  • The potential for reshaping the US onshore portfolio to focus on core positions
  • The metrics that will be used to measure the success of acquisitions in renewables
  • Whether commitments to return cash to shareholders may limit the capital available for M&A activity
  • “Portfolio optimization is a key theme for 2018, with various contractors and service providers already planning divestments of non-core divisions, either as a direct result of M&A activity or as a continued move toward improving cash flows and returns on capital. In 2017,companies shifted their focus away from mere survival toward returns. While growth agendas are now accelerating, companies recognize theneed to take steps to ensure they are getting the right type and mix of assets to maximize shareholder returns and secure mid-term growth.”

    — Andy Brogan, Oil & Gas Transactions Leader, Ernst & Young LLP

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 potential to raise the dividend due to stronger cash flows and balance sheets
  • The priorities for cash — shareholder pay-outs, debt repayment or reinvestment, and returns to investors through capital investment
  • The factors that would trigger the resumption of share buyback programs and the potential size of such programs
  • Reasons for proposed limits on the size of share buyback programs

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:

  • The factors leading to better production growth with lower capital allocation
  • Whether lower planned capital spending is the result of deflation or efficiency gains
  • 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 to three years
  • The ability to adjust capital expenditure budgets in response to lower or higher oil prices
  • If lower levels of capital spending represent a new sustainable level going forward

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
  • Whether cash flow targets should be revised upward due to improvement in the underlying business and the macro environment
  • Reasons for cash flow generation being below expectations despite higher oil prices

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
  • The ability of technology to lead to another step-change in the cost structure
  • Whether inflationary pressures in the US onshore are likely to result in higher unit costs
  • The impact on costs of major project start-ups

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
  • Past production levels relative to guidance and reasons for any significant deviations
  • Factors that may lead to production being at the lower or upper end of guidance range in the next year


This theme relates to the benefits, risks and challenges that may arise from digitalization. Key issues raised on digitalization include:

  • If the wider deployment of digital technologies creates new business risks
  • The strategy for rolling out digital initiatives across the organization
  • Quantification of the benefits that companies expect to derive from digitalization
  • Key challenges that companies will face in implementing a digitalization strategy
  • The parts of the oil and gas business that will benefit most from digitalization
  • "Despite higher oil prices, companies are not planning to raise capital expenditure. In this climate, digitalization is increasingly being adopted to help them grow while controlling costs. But while digitalization is improving productivity, companies need to scale-up small pilots and accelerate technology deployment."

    — Bill Hale, US Oil & Gas Digital Automation Leader, Ernst & Young LLP

Tax position

This theme relates to expected tax rates and costs and also government fiscal policies. Key issues raised on tax include:

  • Guidance on expected cash tax payments in 2018 at a given oil price
  • Whether US tax reform has made investing in the US oil and gas sector more attractive
  • The relative competitiveness of fiscal terms across different countries
  • "The recent US tax reform legislation has, in many cases, made the country more attractive to potential investors. Several oil and gas companies have publicly stated that they will increase investment in the US as a result of the lower tax rate and other changes, which should support the US government’s goal of “energy dominance.” Some countries are already reviewing their hydrocarbon fiscal terms in an effort to enhance global competitiveness."

    — Greg Matlock, Americas Energy Tax Leader, Ernst & Young LLP

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:

  • 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
  • When major projects under development are likely to begin contributing to cash flow
  • The potential for fast-tracking specific projects
  • Response to media reports relating to issues with major projects

Downstream performance

This theme relates to investment and returns in the refining and marketing segments. Key issues raised on downstream performance include:

  • Whether higher marketing margins are due to the macro environment or internal performance improvements
  • The earnings potential from retail positions in new growth markets within the next five years
  • Factors that contributed to stronger downstream performance relative to previous quarters
  • The impact of new environmental regulations on investment and performance of the refining business
  • Confidence in the sustainability of improved cash flow generation from the downstream business
  • "Oil majors’ downstream portfolios are now leaner and more competitive. Efficiency programs have boosted profitability of refining assets. And retail investment is shifting away from developed markets toward high-growth and deregulating markets to capitalize on attractive fuel and non-fuel margins."

    — Fay Shong, Oil & Gas Partner, Ernst & Young LLP

Overview of Q4 2017 themes

Companies used fourth-quarter earnings calls to set out their value proposition to investors. With higher oil prices, a competitive shareholder returns policy is part of the proposition. But what are companies doing to differentiate themselves as an investment case? Digitalization and investment for the longer-term energy transition are strategies companies are increasingly using to differentiate themselves and grow shareholder value.

Value propositions. In the fourth-quarter earnings calls, companies set out their value propositions to win over investors who have shied away from the industry due to weaker returns in recent years. Part of the value proposition is returning cash to shareholders. The theme of shareholder distributions moved up to second place in the ranking in the fourth quarter. Efficiency improvements, higher oil prices and repositioned asset bases have all contributed to lower free cash flow breakevens.

Digital. Strategies being adopted to maintain a competitive dividend increasingly include some application of digital technologies. The theme of digitalization was a new entrant in the ranking in Q4, debuting in seventh place. Questions focused on quantifying the benefits of digitalization as well as identifying the challenges and new risks. Changing the culture of the industry to be more nimble involves attracting a younger generation of employees that have grown up in a mobile and connected world.

Downstream performance. The theme of downstream performance was another new entrant in the ranking in the fourth quarter. There is a renewed appreciation of the value of integration. Refining and petrochemical businesses are reaping the benefits of performance improvement programs that began earlier than similar programs in the upstream. Portfolios have also been streamlined to focus on the most advantaged assets to capture industry leading margins. The theme of portfolio optimization topped the ranking for a second consecutive quarter.

Focus on the long term. An additional component of the value proposition is how companies are positioning themselves for the longer-term energy transition. Each company is placing small, targeted bets on different low-carbon technologies or segments of the customer energy supply chain. This suggests that most oil and gas companies agree on the direction of travel of the transition but are unsure of the final destination. Investors will need to accept that not every bet will be a winner.

Stay informed
Each quarter, you can find the top themes emerging from oil and gas company earnings calls at Look out for these reports through 2018 to see if the themes we have identified for this year materialize.

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

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 Q4 2017 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 1 February to 1 March 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
  • Statoil ASA
  • Suncor Energy Inc
  • TOTAL S.A.
  • Woodside Petroleum Ltd