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EY Analyst themes of quarterly oil & gas earnings: 3Q18


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Oil & gas companies are reporting stronger cash flows and improved bottom lines. Analysts are focused on how that cash will be put to work. Do they return cash to shareholders or do they expand portfolios, possibly taking advantage of stronger market indicators? Macro factors and timing are likely to play a greater role as markets reset.

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EY Analyst themes of quarterly oil & gas earnings: 3Q18

  1. 1. Questions raised by results Analyst themes of quarterly oil and gas earnings Q3 2018
  2. 2. Page 2 Overview of themes1 Contents Top 10 themes ranking2 Key themes in detail3 Scope, limitations and methodology4 3 4 5 11
  3. 3. Page 3 Overview of Q3 2018 themes Oil and gas companies are reporting stronger cash flows and improved bottom lines. Analysts are understandably focused on how that cash will be put to work. Do they return cash to shareholders or do they expand their portfolios, possibly taking advantage of stronger market indicators? Macro factors and timing are likely to play a greater role as markets reset. Two new themes emerged in Q3 2018 — maintenance, expansion and turnarounds — which came in at the ninth spot, as effects of planned and unplanned outages had a noticeable impact on downstream and chemicals segments. Investors are likely to continue to ask the industry to use technology to reduce downtime through predictive maintenance systems as a lever for cost control. It’s always the case that oil prices are front and center for oil industry analysts, but this quarter is the first time that macro factors reached the top 10. The continuing recovery and the market’s search for equilibrium has been the big story throughout the quarter and the heightened focus of the analyst community is no surprise. Beyond the price of crude, the impact of IMO 2020 and the industry’s plans to invest heavily in the downstream and chemical segments will have increasing importance, particularly when it comes to the timing of those investments. Adi Karev Global Sector Leader, Oil & Gas Analysts continue to be focused on oil and gas industry cash flow, capital spending, capital efficiency and the companies’ capacity to pay dividends, buy back stock and return cash to shareholders. Companies continued to build on the momentum from Q2 and reported improved operating cash, and promised continued capital discipline. Capital spending guidance returned to the top of the list, with analysts’ expecting purse strings to loosen as profits strengthen, and though interest in cash flow continues, it dropped slightly in our rankings. Dividend payouts, shareholder distributions and share buybacks are gathering steam, and analysts continue to be interested in companies’ plans. We expect the industry will face increasingly intense questioning about the use of capital, particularly in light of uncertainties around the future of fossil fuels in a carbon-constrained world. Portfolio optimization moved up in Q3. More and more analysts expect US unconventionals, which offer quicker scale-up and production, to have an increasingly important role in the majors’ portfolio. The production outlook is always interesting to investors, as they gauge the impact of prior-quarter portfolio decisions. Sometimes what’s not asked is as revealing as what is. Growth strategies and diversification plans were both absent from analysts’ questions.
  4. 4. Page 4 1 Cash flow targets 2 Major project updates 3 Capital spending guidance 4 Production outlook 5 Portfolio optimization 6 Shareholder distributions 7 Cost control 8 Downstream performance 9 Refining performance 10 LNG market developments Top 10 themes from quarterly earnings calls Q2 2018 1 Capital spending guidance 2 Major project updates 3 Cash flow targets 4 Portfolio optimization 5 Production outlook 6 Shareholder distributions 7 Cost control 8 Downstream performance New 9 Maintenance. expansion and turnaround New 10 Macro outlook Q3 2018
  5. 5. Page 5 Key themes Capital spending guidance guidanceCompanies’ flexibility to ramp up or down their capital expenditure in response to market conditions ► What plans do companies have around allocation of capital toward acquisitions, shareholder distributions and debt servicing? ► Which specific countries will the capital go to? ► Is higher capital spending due to service cost inflation or increased activity? ► Why is capex trending above or below guidance and are there any changes to full-year targets? ► What early indications are there for capital spending for the next two to three years? 1 Major project updates 2 The execution of current projects and the pipeline of future projects ► Are investment decisions expected on major projects in the shortterm? ► What is the status (cost and schedule) of planned new project startups? ► When are major projects under development likely to begin contributing to cash flow? ► What milestones need to be achieved for projects to move toward financial investment decision (FID)? ► What steps are being taken to remove bottlenecks, and improve efficiency and utilization of specific projects?
  6. 6. Page 6 Key themes The appetite for asset sales or purchases - it includes observations on the state of M&A markets. Issues of portfolio balance and exposure to particular asset classes ► What assets are being considered for divestment? What does the road map for disposals over subsequent quarters look like? ► How important is dependence on US assets as a hedge and possible ramp-up of unconventionals’ exposure? ► What is the appetite and capacity for opportunistic bolt-on acquisitions and possible areas of value- creating assets? ► How might market conditions lead to more deal activity, and what philosophy is being employed to narrow down the opportunities? Portfolio optimization4 Balance between sources and uses of cash ► How much uncertainty does the crude price environment bring to cash flow guidance for Q4 and FY19? ► What risks are there to expected cash from disposals and their contribution to cash-flow targets? ► How will cash be managed as price realizations increase and decrease? ► How will upcoming renewals of Production Sharing Contracts (PSCs) affect cash flow guidance? ► How might taxes and unrecognized tax effects erode cash flows over the coming quarters? Cash flow targets 3
  7. 7. Page 7 Key themes Production outlook Targeted production levels and factors that may impact a company’s ability to grow production ► What are production plans and targets, especially US shale and other unconventionals? ► Why did production volumes fall during the first nine months of the year and what are the views on full year production? ► What are the impacts of upstream project acceleration and efficiency on production? ► What risks are there to production in the next year? ► What is the contribution of recent major project startups and acquisitions to production? ► How might non-renewal of PSCs affect production guidance over the coming years? 5 Companies’ strategy for returning capital to shareholders, changes to that strategy and potential risks to delivery ► What is the upside to share repurchase programs if oil prices continue in their current range? ► What is the potential for dividend increases? ► What are the priorities for cash? ► What factors could trigger the resumption of share buyback programs? How big might those programs be? Shareholder distributions6
  8. 8. Page 8 Key themes Actions companies have taken to reduce costs, and trends in the cost of equipment and services ► What are the reasons for higher costs, specifically of upstream operations? ► What is the potential for for further reductions in operating costs? ► What are the initiatives that have enabled operating costs reductions? ► How will operating costs change? ► Are operators implementing contracting strategies to lockin low-service pricing? Cost control 7 Downstream performance Investment and returns in the refining and marketing segments ► Factors contributing to improved or lower-than-expected performance of downstream operations ► Impact of assets sales on downstream earnings ► Possible changes to the guidance on downstream earnings in light of Q3 2018 performance 8
  9. 9. Page 9 Key themes Maintenance, expansion and turnaround Management of planned and unplanned maintenance activities ► How will outages and turnaround schedules impact quarterly results, and how are companies managing that? ► What capacity additions are in the pipeline? What are timelines? What new technology and how much capital is involved in expansion projects? ► How will maintenance plans impact output in upcoming quarters? 9 Macro outlook Macro factors and their impact ► How will the global gasoline market and fuel prices react to IMO 2020? ► What is the trend on global downstream and chemicals demand in Asia? ► How sensitive is the global oil market to demand and supply forces? ► How will crude-oil market dynamics change? 10
  10. 10. Page 10 The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q3 2018 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 25 October – 2 November 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 ► Equinor ASA ► Suncor Energy Inc ► TOTAL S.A. ► Woodside Petroleum Ltd (the company was not included in the analysis this quarter as the analyst call is scheduled after publication) Scope, limitations and methodology of the review
  11. 11. EY | Assurance | Tax | Transactions | Advisory How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2018 EYGM Limited. All Rights Reserved. EYG no. 012518-18Gbl BMC Agency GA 0000_05832 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.