EIA: 2018 Most Profitable Yr for US Oil Producers in 5Yrs
OAKHURST, N.J. (DTN) --- Net income for 43 U.S. oil producers reached a
five-year high in 2018, totaling $28 billion, marking the most profitable year
for these oil producers since 2013, despite the average price of West Texas
Intermediate crude oil being $33 bbl lower in 2018 than 2013 as well as an
approximate 40% within-quarter decline in average WTI price in the fourth
quarter 2018, the Energy Information Administration reports in its latest This
Week in Petroleum series.
"Lower production costs per barrel of oil equivalent and increased
production levels contributed to the highest return on equity---defined as the
$28 billion in net income generated as a share of average shareholder
equity---for the fourth quarter than any quarter in the 2013-2018 period," EIA
said. "As a result of higher net income, more companies have been funding
investments through cash from operating activities, meaning that these
producers are relying less on outside sources of capital for new exploration
The higher net income for the 43 producers was driven by higher production
and revenue, which along with relatively small increases in per-barrel
production costs offset lower prices in 2018 compared with 2013. The 43
companies produced 6.2 million bpd of liquids in the fourth quarter 2018. On a
BOE basis, they increased their total liquids and natural gas production by 9%
from the fourth quarter 2017 to fourth quarter 2018, the second largest
year-over-year increase in the 2013-2018 period that led to an all-time high in
their combined production. The resulting higher revenue, with minimal increases
in upstream costs, contributed to a return on equity of 13% in the fourth
quarter of 2018, the highest quarterly return during the period from 2013
Combining the upstream production expense from the 43 companies' income
statements reveals the trends in cost containment, EIA said.
Although cost per barrel typically correlate with crude oil prices, the
magnitude of cost increases in 2018 was small compared with the increase in
prices. Annual average WTI prices increased 28% from 2017 to reach $65.06 in
2018 but expenses directly related to upstream production activities increased
only 16% to $23.06 BOE. When including depreciation, impairments and other
costs not directly related to upstream production, expenses averaged $48.30 BOE
in 2017, the lowest in the 2013-2018 period.
In contrast to production expenses, upstream revenue for the 43 companies
between 2017 and 2018 increased 31% to average $47.64/BOE in 2018. Upstream
revenue declined 11% between the third and fourth quarters of 2018 because of
falling crude oil prices, which were down an average of 14% between quarters.
However, this group of companies reported hedging nearly one-third of their
fourth quarter 2018 production at prices in the mid-$50 bbl range, offsetting
revenue declines when WTI prices fell lower than $50 bbl by the end of the
year. Consequently, even with the decline in upstream revenue in the last
quarter of 2018, total revenue increased for these 43 companies because of the
gains from financial derivatives, EIA said. Contributions to revenue from
derivative hedges---which increase in value when prices decline---for these 43
companies reached the largest total for any quarter since the fourth quarter
2014, EIA said.
During the entire 2013-2018 period, financial hedging was a source of
revenue less than half of the time, whereas in other quarters it is listed as a
net loss from derivatives.
The 43 companies included in the analysis are listed on U.S. stock exchanges
and, as public companies, must submit financial report to the U.S. Securities
and Exchange Commission. EIA calculates that that they accounted for about
one-third of total U.S. crude oil and natural gas liquids production in the
fourth quarter 2018. Most of these companies' operations are in U.S. onshore
basins with some in the Federal Offshore Gulf of Mexico and Alaska and some in
several other regions across the globe. Because of various corporate mergers
and acquisitions in 2018, the number of U.S. producers that EIA analyzed has
been reduced from 46 companies in 2017 to 43 companies in 2018.
Analyzing the cash flow statements for these 43 companies reveals a broad
increase in the ratio of cash flow generated from operating activities to
capital expenditures. In recent years, an important metric among investors in
oil companies has been the ability of a company to generate more cash from
operations than it expends in capital. Typically, a higher ratio of cash from
operations to capital expenditures reduces a company's financing gap. In 2013,
only seven companies had a ratio of greater than 1.0 and 26 companies had a
ratio of cash from operations to capital expenditures greater than 0.5.
However, in 2018, nine companies had a ratio greater than 1.0 and 35 companies
had a ratio greater than 0.5. In both years, companies with higher production
levels tended to have higher rations, whereas companies with high rates of
production growth but relatively low production levels tended to have lower
ratios, EIA said.
From the fourth quarter 2018 to the first quarter of this year, WTI average
spot prices decreased 8%, but as of April 16 had increased to $64.01 bbl. In
its most recent Short-Term Energy Outlook, EIA forecast WTI spot prices in the
second quarter 2018 would exceed fourth quarter 2018 levels, indicating the
ratio of cash from operations to capital expenditures could increase if the
recent trends in capital expenditure growth and cost containment persist.
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