E&P Sector Hits Record Free Cash Flow

The world’s publicly listed oil and gas companies are bringing in cash at the best rate ever witnessed even though oil prices have only partially recovered from the huge drop suffered in 2014 and 2015.

According to a report by Rystad Energy, energy research and business intelligence company, free cash flow for public exploration and production (E&P) companies skyrocketed last year to almost $300 billion, marking the return of the “super profit” for industry majors.

For these players, 2019 could turn out to be another blockbuster year, it said.

“The fact that E&P companies are able to deliver the same shareholder returns despite much lower oil prices points to an impressive increase in profitability,” says Espen Erlingsen, Head of Upstream Research at Rystad Energy.

A Rystad Energy analysis of estimated global free cash flows (FCF) for all public E&P companies since 2010 shows that FCF peaked in 2011. In the years between 2012 and 2014, FCF declined as E&P companies took on more commitments and investment budgets increased. In 2015, as the oil price collapsed, FCF was reduced considerably. Since 2015, FCF has recovered gradually to the all-time high we see today.

“Our analysis of the latest annual reports from the majors clearly indicates that ‘super profits’ are back for large E&P companies. Free cash flow before financing activities was at a record high in 2018, and the mega profits were typically used to pay down debt and increase payments to shareholders,” Erlingsen added. For 2019, Rystad Energy believes the high free cash flow for E&P companies will continue, hinting that this could be another blockbuster year for these players.

Rystad Energy believes three main factors drive this increased profitability: (1) Higher oil prices: The oil market has gradually returned to balance after a period of oversupply, (2) Lower costs: Since 2014 the cost of developing new projects has fallen on average by 30%, and (3) Lower activity: Global investments within the upstream industry have fallen from around $900 billion to $500 billion.

Rystad Energy has analyzed recent cash flow statements from all the majors plus Norway’s Equinor to get a better sense of who benefits from these profits.

For these companies, cash from operations (defined as revenue, minus all operational costs and taxes) was $211 billion in 2018. Investments totaled $117 billion in 2018, leaving a profit of $94 billion before financing. Out of this, $25 billion was spent on reducing debt, while $69 billion was paid as dividends to shareholders.

“This means that almost 70 cents for every dollar in profits generated last year for these companies ended up in shareholders’ pockets,” Erlingsen remarked.