The shift to more oil and liquids production, and higher commodity prices, have failed to lift corporate returns on average capital employed (ROACE), for exploration and production (E&P) companies, which are lower than they were in 2001, IHS Inc. said Friday.
Energy company performance and capital returns were examined for more than 80 E&Ps, said lead researcher Nicholas D. Cacchione, who is in charge of cost and energy company performance.
"Collectively, these companies averaged an 11% ROACE in 2012 and 8.6% in 2013, both of which are weaker than the ROACE achieved in 2001 when the WTI [West Texas Intermediate] crude oil price hovered at just under $27.00/bbl," he said. "The WTI crude oil price averaged $94.00/bbl in 2012 and $98.00/bbl in 2013...
"My guess is that shareholders are asking, 'what gives?' The culprit is cost escalation. While returns have increased in recent years, costs have accelerated at a rate that has squeezed margins. The more than $60.00/bbl increase in global oil prices since 2002 has been offset by significantly higher costs, and to a lesser degree, weaker U.S. natural gas prices. Margins have basically been frozen.”
The new research mirrors some comments made earlier in the week by Schlumberger CEO Paal Kibsgaard. The North American E&P sector, he said, is facing mounting pressure to build free cash flow and profitability, against stable oil and natural gas prices that "potentially remain range-bound for some time to come" (see Daily GPI, June 26).
In the upstream sector, which comprises the majority of business of the study universe, IHS found that lifting costs have more than quadrupled since 2000 to more than $21.00/boe.
Finding and developing costs have followed a similar trajectory, reaching nearly $22.00/boe in 2013. Financial disclosures by E&Ps indicate that government fiscal take, excluding the impact of royalty volumes, increased from 49% of pretax profits in 2000 to 60% in 2013.
Integrated E&Ps are doing better than the pure-plays, IHS said.
The integrateds, which would include ExxonMobil Corp., BP plc, Royal Dutch Shell plc and Chevron Corp., have earned a 15% ROACE since 2000, "which is substantially higher than the 11% posted by pure E&P companies,” said the firm’s Lysle R. Brinker, energy research director.
"The outperformance by the integrated oil companies can largely be attributed to their geographically and functionally diversified portfolios, which benefit from capital spending programs that are generally more disciplined. They are also aided by the lower-cost basis of the legacy assets that often comprise a large portion of their operations.”
Because of ongoing cost pressures, “companies are increasingly laser-focused on cost containment and exercising greater discipline around the return on their capital investments," Brinker said. "There is greater scrutiny on capital spending at all levels, which will become even more pronounced as the year progresses.
"Every investment has to pass muster on several fronts before it will be funded since there is significant internal competition for that capital."