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of the sector as a whole because the analysis does not represent the financial situation of private companies that do not publish financial reports.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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Headline crude prices for the week beginning 13 January 2020 – Brent: US$64/b; WTI: US$59/b
Headlines of the week
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020
In its latest Short-Term Energy Outlook (STEO), released on January 14, the U.S. Energy Information Administration (EIA) forecasts that generation from natural gas-fired power plants in the electric power sector will grow by 1.3% in 2020. This growth rate would be the slowest growth rate in natural gas generation since 2017. EIA forecasts that generation from nonhydropower renewable energy sources, such as solar and wind, will grow by 15% in 2020—the fastest rate in four years. Forecast generation from coal-fired power plants declines by 13% in 2020.
During the past decade, the electric power sector has been retiring coal-fired generation plants while adding more natural gas generating capacity. In 2019, EIA estimates that 12.7 gigawatts (GW) of coal-fired capacity in the United States was retired, equivalent to 5% of the total existing coal-fired capacity at the beginning of the year. An additional 5.8 GW of U.S. coal capacity is scheduled to retire in 2020, contributing to a forecast 13% decline in coal-fired generation this year. In contrast, EIA estimates that the electric power sector has added or plans to add 11.4 GW of capacity at natural gas combined-cycle power plants in 2019 and 2020.
Generating capacity fueled by renewable energy sources, especially solar and wind, has increased steadily in recent years. EIA expects the U.S. electric power sector will add 19.3 GW of new utility-scale solar capacity in 2019 and 2020, a 65% increase from 2018 capacity levels. EIA expects a 32% increase of new wind capacity—or nearly 30 GW—to be installed in 2019 and 2020. Much of this new renewables capacity comes online at the end of the year, which affects generation trends in the following year.
Forecast generation mix varies in each of the 11 STEO electricity supply regions. A large proportion of the retired coal-fired capacity is located in the mid-Atlantic area, where PJM manages the dispatch of electricity. EIA forecasts that coal generation in the mid-Atlantic will decline by 37 billion kilowatthours (kWh) in 2020. Some of this decline is offset by more generation from mid-Atlantic natural gas-fired power plants; EIA expects generation from these plants to grow by 23 billion kWh.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020
In the Midwest, where the Midcontinent ISO (MISO) manages electricity, EIA expects coal generation to fall in 2020 by 33 billion kWh. This decline is offset by an increase in natural gas electricity generation (12 billion kWh) and by nonhydropower renewable energy sources (13 billion kWh). The regional increase in renewables is primarily a result of new wind generating capacity.
The electric power sector in the area of Texas managed by the Electric Reliability Council of Texas (ERCOT) is planning to see large increases in generating capacity from both wind and solar. EIA expects this new capacity will increase generation from nonhydropower renewable energy sources by 24 billion kWh this year. EIA expects the increased ERCOT renewable generation will lead to a regional decline of natural gas-fired generation and coal generation of 14 billion kWh for each fuel source in 2020.
EIA expects these trends to continue into 2021. EIA forecasts U.S. generation from nonhydropower renewable energy sources will grow by 17% next year as the electric power sector continues expanding solar and wind capacity. This increase in renewables, along with forecast increases in natural gas fuel costs, contributes to EIA’s forecast of a 2.3% decline in natural gas-fired generation in 2021. U.S. coal generation in 2021 is forecast to fall by 3.2%.