What to Glean from Various Q4 2015 E&P Earnings Calls

This article also available at my LinkedIn profile page. 

More than a year into the current oil pricing bust, exploration and production companies are now shifting from an optimistic viewpoint to one of realism and pragmatism. Difficult choices now need to be made, and these companies in recent earnings calls have outlined their plans to weather a generational industry storm; their plans differ greatly based on how much their cash burn is, the strength of their overall balance sheets, and how greatly their assets are levered against massive credit revolvers.

>Anadarko suggested this morning that it will consider cutting its dividend, noting that its yield is too high for its liking, in light of that company’s share price being halved in the past year. Typically companies are apt to vigorously defend their ability to provide a dividend, often choosing instead to dramatically reduce workforce for the purposes of cost reduction – if this comes to fruition, expect the company’s share price to take even more of a hit. MorningStar recently evaluated Anadarko’s with a “BBB” rating, signifying a “moderate default risk.”

>ExxonMobil’s position in the pantheon of the oil and gas industry is well-deserved, having proceeded deliberately but conservatively during both good times and bad. Their debt-to-equity ratio is quite low compared to other industry cohorts, and the relative strength of their balance sheet would allow for targeted acquisition activities should favorable opportunities arise. ExxonMobil forecasts a 25% drop in YOY decline in capital spending; the decline itself itself is not surprising, but this seems to be less of a ratchet-down in spending than other companies. However, they are conserving cash in other ways, such as suspending a previously planned share buyback program – this will help save nearly a billion dollars in the short-term future. They also report their production as having increased approximately 5% in Q4 2015, reflecting the view that they can continue to aggressively produce on the right opportunities, so long as capital spending is kept somewhat in check.

>Lastly, BP reported a brutal 91% drop in earnings in Q4 2015, being impaired by persisting legal costs pertaining to the Deepwater Horizon disaster in the Gulf of Mexico, as well as being mired in unprofitability in its Mexico operations. They are choosing to curtail cash burn by implementing a previously announced cut of 4,000 employees in their E&P operations; this does not include an additional planned cut of 3,000 more employees by the end of 2017.

Ultimately, this is a tough time for the industry, and such sentiment is reflected by the executives of major oil and gas companies worldwide in their investments calls. Gleaning how certain companies are preparing for the downturn and tackling financial challenges can paint a picture for the industry, as well as juxtaposing the viewpoints and commentary of companies in positions of relative strength (e.g., ExxonMobil) versus those who are a bit more distressed (e.g., BP), and even those who very well may declare bankruptcy this year (e.g., Chesapeake).

I would point out to any readers that Oxy reports this Thursday (February 4, 2016) at 10AM EST, 9AM CST (available here) – this is a company that, in my opinion, has wisely divested itself of ancillary assets and doubled-down on its position in the Permian Basin. It is also in decent financial shape, and their viewpoints on the industry currently would be interesting to consider. Also, consider listening to the EOG Resources earnings call as well – this is scheduled for Friday, February 26, 2016 at 10AM EST, 9AM CST (available here).