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102 global oil firms earn $4.8b in Q3 2016

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Shell
About 102 global exploration and production oil companies earned almost $4.8 billion from upstream production during the third quarter Q3 of 2016.

According to the United State Energy Information Administration (EIA) report, even though this is considerably lower compared with earnings from 2011 to 2014, earnings recovered from significant losses that occurred throughout 2015 and the first half of 2016.

The report said oil companies had recently increased price hedging activity, that along with higher earnings, could suggest companies were reducing price risk with plans to increase investment and future production.

For example, Royal Dutch Shell Plc posted third-quarter Current Cost of Supplies (CCS) earnings of $1.4 billion, up from a loss of $6.1 billion for the same quarter a year ago.

Third-quarter CCS earnings excluding identified items were $2.8 billion, up from $2.4 billion for Q3 2015, due to increased production volumes mainly from BG Plc assets, lower operating expenses more than offsetting the increase related to the consolidation of BG, and lower well write-offs, Shell said.

Those benefits were partly offset by the decline in oil, natural gas, and LNG prices, and increased depreciation mainly resulting from the BG acquisition, and weaker refining industry conditions.   The companies in this study produced 33.9 million barrels per day (bpd) in Q3, accounting for about one-third of global liquids production.

The EIA said despite the decline in crude oil prices that began in the Q3 2014, many producers have been able to maintain or slightly increase production.

It stated: “Production was slow to decline because many projects that were approved for development between the 2011 and 2014 period did not begin production until 2015 or 2016, offsetting natural declines from existing wells and cancellation of projects that were more sensitive to lower prices.

“Over the past two years, many companies recorded losses as they wrote down the value of their assets called an impairment -in the low-price environment. An impairment reflects assets that have estimates of future net cash flows below what a company has already spent to develop them. Impairments reduce earnings in the quarter in which a company recogniSes them, but are nonrecurring reductions.

“As oil prices have traded between $40 per barrel (b) and $50/b since the second quarter of 2016, impairments declined significantly from 2015 to 2016, contributing to higher earnings from upstream production. Companies focused on U.S. onshore operations—which experienced comparatively larger impairments than other companies are beginning to see an increase in earnings: over one-half of the companies focusing on U.S. onshore operations had positive earnings in the third quarter of 2016, an increase from the first quarter of 2016 when only nine per cent% of these companies recorded positive earnings.

“Companies typically need to access external sources of capital, such as debt or equity, to finance investment in projects that will increase production and operating cash flows.”

EIA added that the crude oil price decline significantly reduced cash flow for all companies, and many U.S. onshore companies were at risk of defaulting on debt payments or having their access to capital reduced.

It noted that most companies had reduced their capital expenditures at a faster pace than the decline in cash flow, lowering the amount that must be raised from capital markets. U.S. onshore producers and other companies had reduced the ratio of capital expenditures to cash from operations to the lowest level since at least 2011.

It added that lower capital expenditures suggest lower production in the future, although lower cost and improved operating efficiencies can lessen this impact on the oil market.


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