This morning, Bloomberg described 3Q15 as the worst overall earnings season for the S&P 500 since 2009, as aggregate corporate profits plummet. This news won’t come as much of a surprise to anyone working in the O&G sector as the fall-out in oil and gas and other commodity companies is the primary reason why S&P 500 earnings are falling.
In addition to the profit declines, oil and gas sector companies are rapidly adjusting their spending plans, reducing headcounts, cutting investment, halting projects and preparing for a “lower for longer” price scenario by focusing on enhancing reliability and achieving efficiency gains. In short, doing more with less.
While it is indisputable that the news overall has not been good, there’s a marked difference between ‘catastrophic’ and ‘challenging.’ The former adjective denotes an irretrievable predicament; but the latter conveys the possibility of harnessing the creative potential at the heart of the industry to emerge on the other side of this downturn re-oriented, re-calibrated and prepared for prosperity.
In this post, we focus on the forward-looking plans of three US-based E&Ps that reported 3Q15 earnings today: Apache, Devon Energy and Continental Resources.
Apache Raises NAM & International 2015 Guidance
Despite a significantly reduced 2015 capital program, Apache says its production volumes “have shown tremendous resiliency.” Consequently, the company announced it is again raising its FY2015 North American onshore production guidance to a range of 307,000 to 309,000 boepd- up from the previous guidance of 305,000 to 308,000 boepd. This represents more than 2% y/y growth on a pro forma basis.
In 3Q, Apache operated an average of 28 rigs worldwide and drilled 111 gross operated wells, 92 of which were North American onshore. In the Permian Basin alone, the company operated 10 rigs and completed 65 gross operated wells in the quarter, up from 53 well completions in the previous quarter. Production averaged 170,000 boepd, only 1% lower than in 2Q despite significant planned and unplanned facilities downtime.
Apache’s Permian Footprint
Internationally, the company said it achieved record production growth through record production efficiency in the North Sea. This has enabled Apache to raise its FY15 international and offshore pro forma production guidance to 172,000 to 174,000 boepd, up from a previous range of 164,000 to 168,000 boepd. This represents substantial y/y growth of 10 to 12%.
Going into 2016, Apache said “prudent capital allocation will continue to be our primary focus as we strive to spend within cash flows, enhance our returns and grow value for our shareholders.”
Further out, the company said its position in North American shale plays will continue to be its principal catalyst for long-term growth. Moreover, its recent exploration successes in the North Sea and Egypt demonstrate the quality of our international assets and underpin their potential to sustain free cash flows for an extended period of time,” the company said.
Apache’s 3Q loss, of $14.95 a share, was greater than its $1.33 billion loss, about $3.50 a share, in the same quarter last year. Additionally, quarterly revenue dropped to $1.49 billion from $3.44 billion.
Devon Continues Natty Gas-To-Oil Shift
In recent years, Oklahoma-based Devon Energy has shifted its focus from natural gas to oil production via a series of acquisitions and divestitures. Crystallizing this transition is the fact that in 3Q oil accounted for about 70% of the company’s E&P revenue, versus 63% in the same quarter last year.
Devon’s NAM Footprint
Like many of its peers, Devon has been cutting costs and streamlining its operations amid the oil market downturn. In its earnings report, the company said it again reduced its 2015 Capex, this time by $100 million, to range between $3.8 billion and $4 billion.
Devon reported record oil production of 282,000 bpd, a 31% increase verses 3Q14. This result exceeded the top end of its guidance by 2,000 bpd, representing the fifth straight quarter Devon has surpassed oil production expectations.
Citing these strong production results primarily from its NAM operations (mainly its Eagle Ford, Delaware Basin and Rockies assets), the company said it is raising its full-year oil production outlook for the second time in 2015. Total oil production growth this year is now expected to range from 31 to 33%. Due to the improving outlook for oil production, Devon also raised its top-line production growth guidance for 2015 to a range of 8 to 10%.
Overview Of Devon’s Eagle Ford ops
“We are delivering this incremental production growth with significantly lower costs. We are now on pace to save around $1 billion of capital and operating costs in 2015 versus original expectations,” CEO Dave Hegar (who assumed the reins on August 1) said.
Going forward, Hager said the company intends to continue to pursue cost reductions and maintain the flexibility of its capital programs. “Our teams will maximize the value of production by aggressively pursuing cost reductions and we will maintain the flexibility of our capital programs. The advantage of having minimal long-term commitments allows us to dynamically allocate capital to our highest-returning areas while balancing investment with cash flow,” he added.
In its preliminary 2016 outlook, management said it projects E&P capital investment to range between $2.0 and $2.5 billion, with non-E&P capital and dividends in the ~$1 billion range. Devon sees oil production growth next year in the “low-single digits.”
Overall, Devon reported a $3.51 billion loss, or $8.64 a share, from $1.02 billion, or $2.47 a share, in the same quarter last year. Excluding asset write-downs and other items, per-share earnings were $0.70. Revenue fell 33% to $3.6 billion as boosted production was offset by lower average selling prices.
Continental Sees Improvement In “Key Metrics” It Controls
North Dakota’s second-largest oil producer also increased its production guidance, saying that additional cost reductions and technological advancements will help it to produce more oil at a lower price. Continental is increasing its production growth guidance to a range of 24% to 26% for 2015, versus the earlier range of 19% to 23% growth over the previous year.
CEO Harold Hamm said, “We continue to deliver on cost controls and operating efficiencies, while maintaining our exploration focus.”
Continental says it continues to see broad improvement in the key metrics it says it controls: “faster drill times, lower completed well costs, and strong well results from enhanced completions. On the financial side, we remain focused on balancing capital expenditures with cash flow,” Hamm added.
While increasing its production growth guidance, Continental is lowering its 2015 guidance for production expense, G&A expense and non-cash equity compensation expense per Boe of production- “reflecting increased operating efficiencies company-wide.” Overall, the guidance on select costs for 2015 has been reduced by a total of $0.85 to $1.05 per Boe of production.
Net production in 3Q totaled 21.0 M/boepd, or 228,278 boepd, a sequential increase of 1% from 2Q15 and 25% higher than 3Q14. This production included: 147,472 bopd (65% of production) and 484.8 MMcf of natural gas per day (35% of production). Sales volumes also totaled 21.0 million Boe in 3Q, consistent with production for the quarter.
In 4Q, Continental expects daily production to decline compared with 3Q. The company expects to close the year with production of approximately 210,000 boepd.
The company is now operating 23 rigs, including 8 rigs in the Bakken and 15 rigs in Oklahoma (home of the new SCOOP play, to which the company has allocated significant resources over the last year). The Company has recently added two completion crews in Oklahoma, bringing the total crew count to three. In the Bakken, Continental currently has no completion crews active.
Continental’s average daily production by region
The company said it should be cash-flow neutral if WTI remains around $50 for the remainder of 2015. It sees next year’s Capex ranging from ~$1.5 billion to $1.6 billion, and says this level of spending is required to maintain 200,000 boepd average production for 2016. The company said it plans to release detailed 2016 guidance in late December or early January.
Continental’s 2015 Capex budget
Continental reported a net loss of $82.4 million, compared with a profit of $533.5 million in 3Q14.
Feature Image: “Storm’s Coming,” by Robert Johnson