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EY 2014 Survey Details Good Times Before Price Collapse

Expect more asset impairments along with lower capital spending, reduced revenues and year-end reserves from many producers as the impact of depressed commodity prices is fully felt, Ernst & Young LLP (EY) said Wednesday. However, the firm's most recent U.S. oil and gas reserves study looked at 2014 when times were brighter.

Low oil prices in December had little impact on 2014 reporting of industry spending, reserves and revenues. In contrast to 2013, total capital expenditures for the companies studied increased 16% to $200.2 billion in 2014 (see Daily GPI,  June 26, 2014). Likewise, revenues rose 10% while end-of-year oil and gas reserves grew 8% and 7% respectively.

EY's U.S. oil and gas reserves study analyzes exploration and production (E&P) spending and performance data for the past five years for the largest 50 companies based on end-of-year oil and gas reserve estimates.

"Total capital expenditures for study companies have more than tripled from 2005 to 2014 -- even with a big cutback in spending during the 2009 financial crisis," said EY’s Herb Listen, oil and gas co-leader. "However, due to volatile oil prices in the first quarter of 2015, we have seen U.S. producers significantly reduce capital expenditures at an average of 20% to 25% in recent months."

John Russell, EY co-leader, echoed Listen's sentiment.

"In 2012, our report showed the impact of low natural gas prices as producers shifted their focus to oil," Russell said. "Looking forward to 2015 end-of-year reporting, we expect more impairments, with significantly reduced capital expenditures, revenues and year-end reserves, if the current commodity prices continue through the end of the year."

During 2014, all categories of spending increased as total capital expenditures reached $200.2 billion in 2014 compared with $173.1 billion in 2013.

Proved and unproved property acquisition costs accounted for a significant portion of this growth as each rose more than 20% to $27.3 billion and $27.2 billion, respectively. At the same time, development costs increased 15% to $121.3 billion and exploration costs rose 6% to $23.8 billion.

Independents led the way in both development and exploration growth. For development, the independents studied reported a 23% increase compared to 13% for the large independents and 10% for the integrated companies. For exploration, the independents' spending rose 50% in 2014 while spending by integrateds and large independents declined.

"Although 2014 capital expenditures did not reflect current low oil prices, U.S. producers have made substantive adjustments to their capital expenditure plans for 2015," Russell said. "The impact of the reductions in capital expenditures will be evident in our study next year."

For the companies studied, although revenues increased 10% during 2014, all major categories of costs also rose and significant impairments were recorded. As a result, after-tax profits for the study companies declined 13% to $28.8 billion. An increase in combined oil and gas production of 9% drove revenue growth.

Impairments related to low commodity prices at year-end had a notable impact on peer group performance. In total, impairments of US$22.9 billion were recorded during 2014. These impairments were primarily related to full cost ceiling test charges. The impact of impairments on the integrated companies was less significant as their after-tax profits increased 27%. In contrast, the large independents and independents saw after-tax profits decreases of 22% and 19%, respectively.

"Commodity price declines, particularly in the oil market toward the end of 2014, substantially impacted financial performance for some of the study companies -- primarily in the form of impairments stemming from ceiling test charges from full cost companies and certain properties held for sale, " Listen said. "The full cost ceiling test charge trend is likely to continue during 2015 as evidenced by some substantial impairments reported in the first quarter."

Led by the large U.S. independents, oil and gas reserves as well as production continued to grow during 2014. Over the course of the five-year study time period, the large independents increased their oil production by 88%, oil reserves by 74%, gas production by 31% and gas reserves by 28%.

During 2014, oil reserves for the study companies grew 8% to 27.2 billion bbl. Oil production jumped 18% to 2.1 billion bbl in 2014. Both purchases and sales of oil reserves reached record highs for the study period. Purchases of oil reserves accounted for 1.4 billion bbl while sales of oil reserves reached 833.3 million bbl in 2014.

End-of-year gas reserves for the study companies grew 7% to 190.8 Tcf in 2014. Gas production rose slightly to 13.5 Tcf. Purchases of gas reserves accounted for 6.9 Tcf while sales of gas reserves were 9.5 Tcf during 2014.

"There are numerous variables that impact reserve estimates, including commodity prices and the related cost of producing as well as multiple geological and geophysical considerations," Listen said. "However, we will not be surprised to see some downward reserve revisions at the end of 2015 if oil and gas prices continue at current levels for the remainder of the year."

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