Is the glass half full or half empty? The answer to this age-old question usually indicates whether a particular situation is cause for optimism or pessimism. This question is particularly appropriate when trying to put into perspective the cyclical movement of earnings and cash flows for US exploration and production (E&P) companies, including returns that have steadily declined with commodity prices first during the last year. In today’s RBN blog, we analyze Q2 2023 E&P earnings and cash flows and provide perspective on the past and future profitability of US oil and gas producers.
In the second quarter, earnings and cash flows for the 42 US E&P companies we cover declined for the fifth consecutive quarter to $16.7 billion ($12.18/boe) and $31.4 billion ($22.95 $/bop), respectively. The results, a two-year low, were essentially in line with the $12.29/boe profit and $22.95/boe cash flow recorded in the first quarter of 2021, when oil and gas producers all they were just beginning to recover from the market shocks of COVID. From a short-term perspective, the results of the last quarter seem cause for concern. But remember that the song title we used in our Q1 2021 earnings review was Walking in the Sun — Compared to previous quarters, E&P results were excellent. That quarter marked a dramatic turnaround in fortunes as the industry rebounded from $84 billion in losses in the first half of 2020 after the pandemic began. It also represented the highest pre-tax earnings in a decade, surpassing the $10.58/boe recorded in 2014, when oil prices topped $100/bbl. Cash flow was also the second highest in the last decade, surpassed only by 2014.
Historic first-quarter 2021 results were not only cause for celebration, but also kicked off a streak of extraordinary yield growth driven by rising oil prices and tight financial discipline. As shown in Figure 1 below, pre-tax earnings (blue bars) and cash flow (orange bars) peaked in Q2 2022 at $41.48/boe and 51, 02 dollars/boe, respectively. But this golden age for E&P that we described in Camelot it didn’t last Realized prices (gray line) began to fall back in the second half of 2022, and the decline was accentuated in the first half of 2023, mainly due to falling natural gas prices. The average price of WTI oil in the second quarter of 2023 was $73.75/bbl, down 32% from $108.78/bbl in the second quarter of 2022, while the average price of Henry Hub gas fell plummeted to $2.33/MMBtu, down 69% from $7.47/MMBtu over the same period. (For a table showing additional comparisons with previous quarters, click here.)
Figure 1. E&P earnings and cash flow, Q1 2022-Q1 2023.
Source: Oil & Gas Financial Analytics, LLC
