2. Page 2
Overview of themes1
Contents
Top 10 themes ranking2
Key themes in detail3
Scope, limitations and methodology4
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Overview of Q4 2017 themes
Companies used fourth quarter
earnings calls to set out their
value proposition to investors.
With higher oil prices, a
competitive shareholder returns
policy is part of the proposition.
But what are companies doing to
differentiate themselves as an
investment case? Digitalization
and investment for the longer-term
energy transition are strategies
companies are increasingly using
to differentiate themselves and
grow shareholder value.
The theme of downstream performance was another new entrant in the ranking in the fourth quarter. There is a renewed
appreciation of the value of integration. Refining and petrochemical businesses are reaping the benefits of performance
improvement programs that began earlier than similar programs in the upstream. Portfolios have also been streamlined to focus on
the most advantaged assets to capture industry leading margins. The theme of portfolio optimization topped the ranking for a
second consecutive quarter.
An additional component of the value proposition is how companies are positioning themselves for the longer-term energy transition.
Each company is placing small, targeted bets on different low-carbon technologies or segments of the customer energy supply
chain. This suggests that oil and gas companies agree on the direction of travel of the transition but are unsure of the final
destination. Investors will need to accept that not every bet will be a winner.
Adi Karev
Global Sector Leader, Oil & Gas
In fourth quarter earnings calls companies set out their value propositions to win over
investors who have shied away from the industry due to weaker returns in recent years.
Part of the value proposition is returning cash to shareholders. The theme of
shareholder distributions moved up to second place in the ranking in the fourth
quarter. Efficiency improvements, higher oil prices and repositioned asset bases have
all contributed to lower free cash flow breakevens. With stronger balance sheets and no
increase in capital spending, most companies now have the financial flexibility to
improve shareholder returns. A number of companies have announced share buyback
programs. In some cases this is being partly funded by proceeds from asset sales.
Strategies being adopted to maintain a competitive dividend increasingly include some
application of digital technologies. The theme of digitalization was a new entrant in the
ranking in Q4, debuting in seventh place. Questions focused on quantifying the benefits
of digitalization as well as identifying the challenges and new risks. Changing the
culture of the industry to be more nimble involves attracting a younger generation of
employees that have grown up in a mobile and connected world.
4. Page 4
► 1 Portfolio optimization
▲ 2 Shareholder distributions
▼ 3 Capital spending guidance
▲ 4 Cash flow targets
▲ 5 Cost control
▼ 6 Production outlook
NEW 7 Digitalization
► 8 Tax position
▼ 9 Major project updates
NEW 10 Downstream performance
Top 10 themes from quarterly earnings calls
Q4 2017
1 Portfolio optimization
2 Capital spending guidance
3 Production outlook
4 Shareholder distributions
5 Major project updates
6 Cash flow targets
7 Cost control
8 Tax position
9 Exploration strategy
10 Policy and regulation
Q3 2017
5. Page 5
Key themes
Portfolio optimization
This theme relates to questions on the appetite for further asset sales or purchases. It
includes observations on the state of M&A markets. Additionally, it incorporates issues of
portfolio balance and exposure to particular asset classes. Key issues raised on portfolio
optimization include:
► Whether companies have reset their asset sales targets following the completion of major divestment
programs
► The assets within the portfolio that are considered core or non-core
► Appetite and capacity for opportunistic bolt-on acquisitions
► The extent of the pivot to shorter cycle time, high-return investments
► The potential for reshaping the US onshore portfolio to focus on core positions
► The metrics that will be used to measure the success of acquisitions in renewables
► Whether commitments to return cash to shareholders may limit the capital available for M&A activity
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6. Page 6
Key themes
This theme relates to a company’s strategy on shareholder returns, any changes to that strategy
and potential constraints on delivery. Key issues raised on shareholder distributions include:
► The potential to raise the dividend due to stronger cash flows and balance sheets
► The priorities for cash – shareholder pay-outs, debt repayment or reinvestment, and returns to investors through
capital investment
► The factors that would trigger the resumption of share buyback programs and the potential size of such programs
► Reasons for proposed limits on the size of share buyback programs
Shareholder distributions2
Capital spending guidance
3 This theme relates to the flexibility that companies have to ramp up or down their capital
expenditure in response to market conditions. Key issues raised on capital expenditure include:
► The factors leading to better production growth with lower capital allocation
► Whether lower planned capital spending is the result of deflation or efficiency gains
► Reasons for capex trending above/below guidance and any changes to full-year targets
► Early indications of the potential range for capital spending for the next two-three years
► The ability to adjust capital expenditure budgets in response to lower or higher oil prices
► If lower levels of capital spending represent a new sustainable level going forward
7. Page 7
Key themes
Cash flow targets
This theme relates to the balance between sources and uses of cash. Key issues raised on
cash flow include:
► Identification of one-time reasons for variations in cash flow quarter-on-quarter and full-year guidance
► The level of oil or gas price required to be cash flow breakeven
► The priorities for the use of excess cash flow if oil prices turn out to be higher than planned
► Whether cash flow targets should be revised upward due to improvement in the underlying business
and the macro environment
► Reasons for cash flow generation being below expectations despite higher oil prices
4
This theme relates to actions companies have taken to reduce costs and trends in the cost of equipment
and services. Key issues raised on cost reduction include:
► Scope for further reductions in operating costs compared with previous guidance
► Guidance on the sustainable level of operating costs going forward
► The ability of technology to lead to anther step-change in the cost structure
► Whether inflationary pressures in the US onshore are likely to result in higher unit costs
► The impact on costs of major project start-ups
Cost control
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Key themes
This theme relates to targeted production levels and factors that may impact a company’s ability to
grow production. Key issues raised on production outlook include:
► Clarification on the underlying production decline rates
► The status of producing assets in countries where there are security issues
► The expected level of production associated with a given number of active rigs in the US onshore
► Past production levels relative to guidance and reasons for any significant deviations
► Factors that may lead to production being at the lower or upper end of guidance range in the next year
Production outlook6
Digitalization
This theme relates to the benefits, risks and challenges that may arise from digitalization.
Key issues raised on digitalization include:
► If the wider deployment of digital technologies creates new business risks
► The strategy for rolling out digital initiatives across the organization
► Quantification of the benefits that companies expect to derive from digitalization
► Key challenges that companies will face in implementing a digitalization strategy
► The parts of the oil and gas business that will benefit most from digitalization
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NEW
9. Page 9
Key themes
Tax position
This theme relates to expected tax rates and costs and also government fiscal policies. Key
issues raised on tax include:
► Guidance on expected cash tax payments in 2018 at a given oil price
► Whether US tax reform has made investing in the US oil and gas sector more attractive
► The relative competitiveness of fiscal terms across different countries
8
This theme relates to the execution of major projects and the pipeline of capital projects. Key
issues raised on major projects include:
► Whether final investment decisions are expected on any major projects in the short-term
► Updates on the status (cost and schedule) of planned new project start-ups
► When major projects under development are likely to begin contributing to cash flow
► The potential for fast-tracking specific projects
► Response to media reports relating to issues with major projects
Major project updates9
10. Page 10
Key themes
Downstream performance
This theme relates to investment and returns in the refining and marketing segments. Key
issues raised on downstream performance include:
► Whether higher marketing margins are due to the macro environment or internal performance
improvements
► The earnings potential from retail positions in new growth markets within the next five years
► Factors that contributed to stronger downstream performance relative to previous quarters
► The impact of new environmental regulations on investment and performance of the refining business
► Confidence in the sustainability of improved cash flow generation from the downstream business
10
NEW
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The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q3 2017 earnings
reporting season among 12 global oil and gas companies.
The identification of the top 10 themes is based solely on an examination of the transcripts of the earnings conference calls held from
1 February to 1 March 2018.
For this analysis, the following companies were included:
► BP plc
► Chevron Corporation
► ConocoPhillips
► Eni SpA
► Exxon Mobil Corporation
► Husky Energy Inc
► Repsol SA
► Royal Dutch Shell plc
► Statoil ASA
► Suncor Energy Inc
► TOTAL S.A.
► Woodside Petroleum Ltd
Scope, limitations and methodology of
the review