Transitioning from growth to value amid abundant oil

HOUSTON -- For the top 50 largest U.S. E&P companies, revenues and capital expenditures dropped 41% during 2015—the first year since 2004 that EIA-posted monthly WTI spot prices averaged below $60/bbl for the entire 12 months.

Ernst & Young (EY) LLP’s U.S. oil and gas reserves study 2016, which analyzes U.S. E&P results based on end-of-year oil and gas reserve estimates, found study companies reported total capital expenditures of $117.5 billion and revenues of $129.8 billion.

Amid staggering downward reserve revisions (4.1 Bbbl of oil and 40.0 Tcf of gas), end-of-year oil reserves decreased 12% to 24.1 Bbbl and end-of-year gas reserves dropped 21% to 147.0 Tcf. Additionally, property impairments (including ceiling test charges)—which were recorded by 44 of the 50 study companies—totaled $141.8 billion during 2015.

“The significant spending cuts and downward reserve revisions reported in 2015 are illustrative of a structural shift taking place in the industry as a result of abundant oil,” said Herb Listen, Assurance Oil & Gas Leader for EY in the U.S.. “No longer are capital investment decisions driven by the pursuit of growth, instead the industry and those investing in it are progressively more focused on cash flow and returns.”

Revenues and profits

Although combined oil and gas production increased 6% in 2015, prices caused revenues to decline 41% to $129.8 billion for the year. This significant drop coupled with substantial property impairments led study companies to report net losses of $112.0 billion.

The largest impairments were reported by companies that follow full cost accounting, which requires a “ceiling test” be conducted each quarter to review properties for impairment. These tests require companies use a 12-month average of the first-day-of-month reference prices.

“Amid low prices, declining hedges and the drastic drop in revenues, many US producers are experiencing rating downgrades and lower reserve base borrowing limits and, consequently, less cash flow and liquidity,” said Mitch Fane, Oil & Gas Transactions Leader for EY in the Southwest Region. “Already, bankruptcies and restructurings have increased as have dividend and interest payment deferrals. This trend is expected to continue amid lower-for-longer oil.”

Capital expenditures

Capital spending saw a marked decline across the board in 2015.

Amid less merger and acquisition activity than many projected, proved and unproved acquisition costs dropped 79% to $5.4 billion and 63% to $10.0 billion, respectively.

“While many expect an uptick in asset sales due to oil and gas companies’ need for capital, the most valued E&P assets in this current environment are frequently the lifeblood of their companies’ operations,” Fane said. “As a result, the bid-ask spreads for quality, producing properties and declining values of some non-producing properties have hindered transactions and private equity investment thus far.”

Declines in exploration and development spending of 28% and 31%, respectively, were evident in the study companies’ reduced drilling activity. The number of net wells drilled declined 41% (exploratory wells) and 31% (development wells) in 2015.

Exploration spending totaled $17.1 billion in 2015, compared with $23.6 billion in 2014. Independents led the charge by reducing their exploration spending by 39%. Development spending declined from $122.8 billion in 2014 to $84.7 billion in 2015 as all of the study companies decreased their development spending.

“The independents and large independents accounted for the most significant cuts to exploration and development spending, while the integrateds actually increased exploration spending by 9%,” Listen said. “Looking forward to 2016 and 2017, the full range of US producers will face continued pressure to reduce spending if prices remain at current levels.”