The stock prices of U.S. oil exploration and production (E&P) companies relative to the broader U.S. equity market index have declined since the start of the year. Lower stock prices could make it more difficult for U.S. E&P companies to raise the capital needed for their investment programs. Despite the implication of lower market capitalization, through the second quarter of 2019, the profitability and cash flow generation for the 42 U.S. oil producers the U.S. Energy Information Administration (EIA) regularly follows have increased since 2017, suggesting less reliance on capital markets to fund capital expenditure. EIA based this analysis primarily on the published financial reports of these 42 companies, so it is not necessarily representative of the sector as a whole because the analysis does not represent the financial situation of private companies that do not publish financial reports.
The combined cash from operations for these 42 companies totaled $19.2 billion in the second quarter of 2019, a year-over-year increase of $0.8 billion. In addition, these companies' combined capital expenditure totaled $18.5 billion, a year-over-year decline of $0.9 billion (Figure 1). Since the beginning of 2017, quarterly capital expenditures ranged between $16 billion and $21 billion. Growth in cash from operations has been larger than the growth in capital expenditures since mid-2017, and the two have been relatively consistent since mid-2018. This trend implies that the companies generally have been able to fund their capital expenditure programs increasingly through cash flow from operating activities and less from outside sources of capital, such as debt or equity. In fact, these companies have used more funds for financing activities such as reducing debt and repurchasing shares than they received from incurring debt and issuing shares since the second quarter of 2017.
The 42 companies' production and returns on equity have also increased since 2017. Production gains have come largely through productivity increases during this time, although some production growth is the result of companies that merged with or acquired assets from companies outside of this set of 42. By using longer laterals in horizontal drilling, as well as injecting more proppant per foot, U.S. E&P companies have increased average output per well. According to the 42 companies' income statements, however, upstream production costs did not increase at the same rate as total output growth through the second quarter of 2019, allowing the 42 companies to increase production and returns on equity while maintaining capital expenditures lower than $21 billion per quarter. The companies' combined return on equity and year-over-year production growth each reached 11% as of the second quarter of 2019 (Figure 2).
Despite the increase in returns, production, and cash flow from operations, the combined market capitalization for these 42 companies was $380 billion as of the end of the second quarter of 2019, a year-over-year decline of 28%. The stock prices for many of them continued to decline in the third quarter of 2019. The broader S&P Oil & Gas Exploration & Production Select Industry Index, which represents stock prices for 63 U.S. oil companies, recently declined to low levels relative to the broader U.S. equity market. When compared with the Russell 3000 Index, a stock index that represents almost all publicly traded equities in the United States, the S&P Oil & Gas E&P Index declined throughout the second quarter of 2019 and reached the lowest level since late 2000 in August (Figure 3).
Market capitalization and stock prices often indicate investors' forward-looking expectations and sentiment. In this case, relatively low stock prices for U.S. E&P companies may reflect investor beliefs that E&P companies' future growth or profitability potential is low. Similarly, a declining ratio with the broader Russell 3000 Index implies investors expect other sectors of the U.S. economy have greater growth potential than the U.S. E&P sector. This expectation suggests that investors may have some concerns about whether the profitability and production growth seen in the financial statements as of the second quarter of 2019 will continue.
Low stock prices indicate expectations of lower profits and growth for U.S. E&P companies. More directly, some E&P companies would not be able to raise as much debt or equity financing with a low stock price than they otherwise would. At the same time, more companies have been able to increase cash from operations and fund investment through retained earnings, effectively reducing the need for outside sources of capital. The ability of these companies to maintain similar returns and production growth rates through cash from operations will continue to depend primarily on crude oil prices, trends in productivity per well, and oilfield services costs.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose 10 cents from the previous week to $2.65 per gallon on September 23, 19 cents lower than the same time last year and the largest single week increase in the U.S. average regular gasoline retail price since September 4, 2017. The Midwest price rose by 13 cents to $2.59 per gallon, the Gulf Coast price rose by 12 cents to $2.35 per gallon, the East Coast price rose nearly 9 cents to $2.54 per gallon, the West Coast price rose over 8 cents to $3.34 per gallon, and the Rocky Mountain price increased by more than 4 cents to $2.70 per gallon.
The U.S. average diesel fuel price rose more than 9 cents to $3.08 per gallon on September 23, 19 cents lower than a year ago and the largest single week increase in the U.S. average diesel fuel price since September 4, 2017. The Midwest price rose by 11 cents to $2.99 per gallon, the Gulf Coast price rose by nearly 10 cents to $2.86 per gallon, the East Coast price rose by nearly 9 cents to $3.08 per gallon, and the West Coast and Rocky Mountain prices each rose by nearly 8 cents to $3.65 per gallon and $3.03 per gallon, respectively.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.0 million barrels last week to 99.7 million barrels as of September 20, 2019, 13.1 million barrels (15.2%) higher than the five-year (2014-18) average inventory levels for this same time of year. East Coast and Midwest inventories decreased by 1.2 million barrels and 0.9 million barrels, respectively. Gulf Coast and Rocky Mountain/West Coast inventories increased by 0.9 million barrels and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 4.3% of total propane/propylene inventories.
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In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.
In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.
Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.
We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.
Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.
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The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.
How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.
The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.
The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.
On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.
But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.
For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.
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