On Monday, global auditing firm EY (Ernst & Young) released the results of a study documenting the fallout of a historically lousy (and probably pivotal) market year for oil and gas companies, as the industry grappled with drops in oil demand, revenues, capex and reserves. The results, which are detailed in EY’s new (2021) U.S. oil and gas reserves, production and ESG benchmarking study, includes an analysis of reserves and production from the 50 largest publicly traded E&P (exploration and production) companies, measured against their respective ESG disclosures.
EY found that, in 2020, large-cap oil companies posted their lowest revenues since 2016 at $110.8 billion, with $66.6 billion booked in impairment charges (more than 300 percent above the previous five-year high) due to oil prices declines. Capital expenditure came in at $60.3 billion, 60 percent lower than the previous year, and the lowest for the five-year period reflected in the study. This segment of the oil & gas industry also recorded its first net loss since 2016, with after-tax losses topping $84 billion.
“2020 has the potential to be a profoundly transformative year for energy,” EY Americas Energy & Resources, and U.S. Oil & Gas Leader Mitch Fane said in connection with the report’s release. “As the market recovers from the pandemic and the financial positions of companies improve, the future of the industry will be determined. One thing is certain: there’s no stopping the energy transition. The oil and gas companies that remain today are confronting the immense challenge of how to access capital, reinvest and reshape their businesses.”
As of the end of the study period (mid-June 2021), EY found that oil, gas and LNG markets have stabilized–with WTI crude at around $70 per barrel and Henry Hub gas hovering at the high end of the five-year range at around $3.25/MMBtu–to the extent that that oil and gas companies can now begin to make future projections.
But the industry backdrop has changed in key respects. Demand is returning to pre-pandemic levels, albeit with the exception of international travel (which is critical to industry projections, as aviation fuel represents more than 5 percent of global oil demand, and longer-term effects of covid on air travel remain unclear). Additionally, oil-exporting countries (OPEC) have been extremely disciplined about returning supply to the market, opting instead to take a longer-term view on demand dynamics.
And finally, even as prices continue to recover, EY says U.S. companies’ oilfield capital expenditure plans are still up in the air, as companies may be under pressure from investors to reduce debt, return capital, and/or demonstrate better commitment to ESG principles in the post-covid reality. EY noted that plowback percentages were on a downward trend for several years prior to covid, as capital markets shifted expectations of U.S. shale away from production growth and instead toward return on investment.
Against this new set of challenges, EY’s Fane says, a few likely strategic paths have emerged for E&P, integrated and independent U.S. energy companies.
“The higher prices of 2021, and the substantial cost-cutting of last year, have boosted 2021 earnings and illuminated three probable paths for E&Ps moving forward,” said Fane. “While the integrateds seem more likely to use their capital to invest in decarbonization and alternative energies, many independents will be more likely to reinvest in their core business as oil and gas continues to be needed for decades to come. A smaller subset of companies may choose a path toward slow liquidation, returning capital to shareholders instead of investing for the future.”
Meanwhile, ESG disclosures are likely to remain both a core consideration and a challenge to implement for these companies. While more than three-fourths of companies studied have published a sustainability or ESG report (including all of the integrates, 93 percent of the largest independents, and almost two-thirds of the other independents), only 16 percent of all companies surveyed are currently providing third-party assurance over ESG metrics. Due to a lack of ESG standardization and companies following a patchwork of ESG frameworks, EY says, third-party assurance will become increasingly important to energy investors in the years to come.
