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Last Updated: December 16, 2021
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Financial results for 47 U.S. exploration and production (E&P) companies show limited growth in capital expenditure during the third quarter of 2021 (3Q21), despite more cash from operations. Oil prices have been generally increasing since 3Q20, reaching seven-year highs in November 2021. Although cash from operations has more than doubled over the past four quarters for these companies, capital expenditure increased by comparatively less (54%) and remained significantly lower than the 2015–19 average. With higher cash flow, publicly traded E&P companies were repurchasing more of their shares of stock, increasing dividends, paying down debt, and increasing their cash balances. Our analysis of public statements from these companies suggests capital expenditure this year will be effectively the same as in 2020.

We base this analysis on the published financial reports of 47 publicly traded U.S. oil companies. As a result, the observations do not necessarily represent the sector as a whole because the analysis does not include private companies that do not publish financial reports. In 3Q21, these 47 publicly traded companies collectively produced 5.3 million barrels per day (b/d) of crude oil and natural gas liquids (NGL) in the United States, or about 32% of all U.S. crude oil and NGL production for the quarter.

The West Texas Intermediate (WTI) crude oil price averaged $70.61 per barrel (b) in 3Q21, an increase of $29.72/b (73%) compared with 3Q20. Higher prices contributed to a year-over-year gain of 130%, or $12.8 billion, in cash from operations. Cash from operations reached $22.7 billion in 3Q21, the most generated by these companies in any quarter since 3Q18. Their liquids production was flat year-over-year at 6.0 million b/d in 3Q21 and declined by 4% from the previous quarter. Compared with pre-pandemic levels, production in 3Q21 was 1.2 million b/d (16%) less than in 1Q20. Over the last four quarters, their capital expenditure increased by 54% to reach $9.3 billion in 3Q21 (Figure 1).

Figure 1. Cash flow statement items for 47 U.S. oil companies

Capital expenditure by these companies began declining at the beginning of 2019 and decreased year-over-year by $3.9 billion (20%) in 1Q20. The significant decline of crude oil prices in 2020 associated with the COVID-19 pandemic accelerated the decline in capital expenditure, which fell to $6.1 billion in 3Q20 and led to cash from operations falling to $3.8 billion in 2Q20, the lowest level for either since at least 2012. Although cash from operations increased by $18.9 billion through 3Q21 compared with its 2020 low, capital expenditure increased by only $3.3 billion. Historically, the ratio of capital expenditure to cash flow has been greater than 100%, reflecting the capital intensive nature of exploration and production as well as the need for outside sources of capital to fund drilling projects. With more growth in cash from operations than in capital expenditure, however, this ratio fell to 41% in 3Q21, the lowest ratio on record since 1995 (Figure 2).

Figure 2. Ratio of capital expenditure to cash flow for 47 U.S. oil companies

In 2020, significant economic disruptions contributed to the most U.S. corporate bankruptcies since 2010, including 69 in the energy sector. In this context, E&P companies focused less on long-term investments in capital expenditure and more on paying down debt, repurchasing shares, and increasing dividends to improve their short-term financial positions and improve shareholder returns. In the first three quarters of 2021, these 47 companies paid off $15 billion in debt, repurchased $1.9 billion in shares, and paid out $6.9 billion in dividends, coming close to matching the $25.3 billion spent on capital expenditure (Figure 3). In 3Q21 alone, these companies reduced debt by $7.9 billion dollars, more than any other quarter in over 10 years, and brought their long-term debt to the lowest level since 2012. Dividends for the first three quarters reached their highest level since 2015, and companies distributed 26% more cash to shareholders than their five-year (2016–2020) average. In addition, these companies increased their cash balances by $11.2 billion, increasing their cash reserves above their five-year average. Increased cash reserves can stabilize business operations in volatile price environments, but they also can serve to prepare for acquisitions or other uses of cash.

Figure 3. Sources and uses of cash for 47 U.S. oil companies

Publicly traded companies often publish future plans for their operations and spending, called company guidance, to help investors analyze company performance. Some, but not all, companies release this information in corporate presentations, press releases, and official filings with the U.S. Securities and Exchange Commission. An analysis of company guidance from 41 currently operating and 21 formerly operating E&P companies shows that actual capital expenditure in the last four years exceeded announced spending by 9% on average (Figure 4). However, actual spending in 2019 and 2020 showed a smaller deviation from guidance numbers, likely due to declining capital expenditure budgets in those years. If actual spending compared with company guidance in 2021 matches the deviation seen in 2020, this year’s capital expenditure will be effectively flat compared with actual spending in 2020. As of December 10, 2021, only two companies in the dataset have provided guidance on capital expenditure in 2022.

Figure 4. Capital expenditure for 62 U.S. oil companies

U.S. average regular gasoline and diesel prices decrease

The U.S. average regular gasoline retail price decreased nearly 3 cents to $3.32 per gallon on December 13, $1.16 higher than a year ago. The Gulf Coast price decreased 5 cents to $2.94 per gallon, the Rocky Mountain price decreased nearly 4 cents to $3.43 per gallon, and the Midwest, East Coast, and West Coast prices each decreased more than 2 cents to $3.08 per gallon, $3.28 per gallon and $4.16 per gallon, respectively.

The U.S. average diesel fuel price decreased nearly 3 cents to $3.65 per gallon on December 13, $1.09 higher than a year ago. The Gulf Coast price decreased 3 cents to $3.37 per gallon, the East Coast price decreased nearly 3 cents to $3.63 per gallon, the Midwest and Rocky Mountain prices each decreased more than 2 cents to $3.51 per gallon and $3.76 per gallon, respectively, and the West Coast price decreased nearly 2 cents to $4.40 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 2.4 million barrels last week to 70.9 million barrels as of December 10, 2021, 8.1 million barrels (10.2%) less than the five-year (2016-2020) average inventory levels for this same time of year. Gulf Coast, East Coast, Midwest, and Rocky Mountain/West Coast inventories decreased by 1.3 million barrels, 0.5 million barrels, 0.4 million barrels, and 0.1 million barrels, respectively.

Residential heating oil prices increase, propane prices decrease

As of December 13, 2021, residential heating oil prices averaged nearly $3.35 per gallon, almost 3 cents per gallon above last week’s price and $1.01 per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged nearly $2.39 per gallon, 13 cents per gallon above last week’s price and almost 85 cents per gallon above last year’s price.

Residential propane prices averaged nearly $2.70 per gallon, more than 1 cent below last week’s price but almost 80 cents per gallon above last year’s price. Wholesale propane prices averaged nearly $1.20 per gallon, almost 3 cents per gallon above last week’s price and 48 cents per gallon above last year’s price.

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 


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