Assessing 2014 oil and gas company financials (4/29/2015)

This Week in Petroleum

Wednesday, 31 December 1969

Release date: April 29, 2015 | Next release date: May 6, 2015

A review of the cash flow statements for 75 global oil and natural gas companies finds that annual cash flow in 2014 was similar to 2013 and 2012, which is not unexpected given that North Sea Brent crude oil prices in 2014 averaged close to their levels in 2012 and 2013 despite a sharp decline in the last quarter. Combined cash from operations for this group of companies totaled $456 billion and capital expenditures totaled $449 billion (Figure 1). Capital expenditures for the full year decreased compared with 2013, driven by large cuts in planned investment spending in the fourth quarter. Low first-quarter 2015 crude oil prices suggest first-quarter results, which will be released over the next month, will likely show steep declines in cash flow and investment spending for this group of companies.

The companies in this set focus mainly on upstream production, with assets all over the world and most production coming from oil and other liquids instead of natural gas. In 2014 the 75 companies produced 22 million barrels per day, approximately 39% of non-OPEC liquids production.

Despite the crude oil price decline in the fourth quarter of 2014, full-year 2014 cash from operations increased compared with 2013, partly because of high crude oil prices for the first three quarters of 2014, but also because of other operational activity, such as reducing inventories, which increases working capital and recoups cash. Capital expenditures declined in the fourth quarter as companies reduced planned investment. The difference between cash from operations and capital expenditures, known as free cash flow, is the cash a company can use to service debt payments, pay dividends to shareholders, and for other nonoperational uses, such as repurchasing shares of stock. Free cash flow was $7.5 billion for 2014, higher than in the previous two years but significantly less than the previous five-year average (Figure 2). Capital expenditures were high in these years because oil prices signaled the need to meet growing demand with increases in supply.

Since 2012, the sources and uses of cash for these companies have shifted compared with previous years. As cash from operations flattened, nonoperational sources of cash—such as sales of property, sales of other lines of business, or raising money from capital markets—provided funds for nonoperational purposes, like paying dividends or repurchasing stock. Figure 2 shows that 2014 free cash flow was approximately 10% of the 2007-11 average, with nonoperational sources of cash (asset sales and debt) more than doubling, from an average of $61 billion in 2007-11 to $129 billion in 2014. Net share repurchases and dividends to shareholders were slightly above the 2007-11 average, increasing $2 billion to $117 billion.

A combination of factors contributed to changing sources and uses of cash for these companies. Oil companies increased capital expenditures because prices were high enough to create an incentive to explore to expand reserves. Oil companies need to replace proved reserves in order to sustain long-term operations. Low borrowing rates have also encouraged companies to use outside sources of capital to augment sources of cash to meet their spending needs.

The smaller, growing companies in this set typically need to fund exploration and development from debt, as cash from operations becomes available only after production increases. Some companies increased nonoperational spending by raising dividends or repurchasing shares of outstanding stock, suggesting confidence in the adequacy of expected increases in cash from operations to service future obligations and investment.

Lower oil and gas prices could make it difficult to increase debt to meet investment spending while maintaining distributions to shareholders. Some companies have already announced plans to reduce nonoperational spending by eliminating share repurchase programs or reducing dividend payouts for 2015. Ultimately, lower prices reduce the expected revenue from production, which reduces the cash available to service debt payments as well as to fund future investment. However, the year-end 2014 cash balances for this group of companies compared with year-end short-term liabilities are at the highest levels of the comparison period, although there is variation by company. In addition, many companies have hedged some production, which could soften the impact of low prices. Companies may adopt a combination of strategies in response to lower cash flow, including reducing capital expenditures or dividends, issuing stock, exploring mergers and acquisitions, and pursuing operational joint ventures to improve efficiency and reduce costs.

West Coast leads U.S. average gasoline and diesel fuel prices higher

The U.S. average retail price for regular gasoline increased nine cents over the last week to $2.57 per gallon as of April 27, 2015, down $1.14 from the same time last year. The West Coast price rose 21 cents to $3.18 per gallon on new and ongoing refinery outages. The East Coast price increased seven cents to $2.52 per gallon, followed by the Gulf Coast price, which rose six cents to $2.31 per gallon. The Rocky Mountain price increased five cents to $2.48 per gallon. The Midwest price increased four cents to $2.44 per gallon.

The U.S. average retail price for diesel fuel increased to $2.81 per gallon, three cents more than the week prior and $1.16 per gallon lower than the same time last year. The West Coast price was up six cents to $3.03 per gallon. The Midwest price increased three cents to $2.69 per gallon. The East Coast, Gulf Coast, and Rocky Mountain prices each rose two cents, to $2.95 per gallon, $2.68 per gallon, and $2.73 per gallon, respectively.

Propane inventories gain

U.S. propane stocks increased by 2.6 million barrels last week to 64.7 million barrels as of April 24, 2015, 33.1 million barrels (105.1%) higher than a year ago. Gulf Coast inventories increased by 1.2 million barrels and Midwest inventories increased by 1.0 million barrels. East Coast inventories increased by 0.4 million barrels and Rocky Mountain/West Coast inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 7.4% of total propane inventories.