EY Analysis Reveals how Devastating 2020 was for US Oil and Gas; Three Paths for Producers Moving Forward
Wednesday, September 1st, 2021
Last year was unique among down cycles experienced by the oil and gas industry, as reflected by considerable drops in oil demand, revenues, capital expenditures (capex) and reserves, according to the EY US oil and gas reserves, production and ESG benchmarking study. The study documents the historic fallout during 2020 with analysis of reserve and production information from the industry's 50 largest publicly traded exploration and production companies — based on year-end 2020 US oil and gas reserves — as well as their environmental, social and governance (ESG) disclosures.
Companies in the study posted the lowest revenues since 2016 at US$110.8 billion, as the effect of cratered global demand, prices, and increasing investor pressure all weighed on financial performance. Impairment charges amounted to US$66.6 billion, the highest for the five-year study period by more than 300% due to the significant decline in oil prices. After-tax losses were US$84.1 billion — the first loss since 2016.
"2020 has the potential to be a profoundly transformative year for energy," said Mitch Fane, EY Americas Energy & Resources Leader and EY US Oil & Gas Leader. "As the market recovers from the pandemic and the financial positions of companies improve, the future of the industry will be determined. One thing is certain: there's no stopping the energy transition. The oil and gas companies that remain today are confronting the immense challenge of how to access capital, reinvest and reshape their businesses."
Capital expenditures, production and reserves
According to the study, capex totaled US$60.3 billion, 60% lower than 2019, the lowest for the study period, with decreased investment in all categories: proved properties acquired, unproved properties acquired, exploration, development and other. The companies studied drilled 41% and 32% fewer development and exploration wells, respectively, compared with 2019.
"The lower commodity price environment of last year caused a significant drop in capex and significant impairments," said Herb Listen, EY Americas Energy & Resources Assurance Leader. "Though prices have recovered, we haven't seen a rebound in capex in 2021 and, as a result, likely won't see a return in US production to the same pre-pandemic levels. This will cause a ripple effect as the market struggles to meet recovering demand and may result in higher prices."
Oil production was 2.8 billion barrels and gas production was 13.2 trillion cubic feet (tcf), only a 2% decrease from 2019, which saw the highest oil and gas production during the study period. The companies reported combined oil reserves of 26 billion barrels and combined gas reserves of 148 tcf, decreases of 19% and 13%, respectively, compared with 2019 primarily driven by downward revisions of 5.1 billion barrels and 19.4 tcf due to lower commodity pricing and decreased forecasted capital investment commitments.
More than three-fourths of the companies studied have published a sustainability or ESG report — including all of the integrateds, nearly all of the large independents (93%) and 65% of the other independents. Company goals were most often identified for environmental topics (53%), while goals for social (33%) and governance (10%) topics were less often stated.
"ESG and sustainability have become essential to attracting capital and creating long-term value for all stakeholders," said Listen. "Interestingly, very few companies in our study — only 16% — are providing third-party assurance over ESG metrics. Due to a lack of standardization and companies following various frameworks, the importance of third-party assurance to investors is going to grow."
As the global economy emerges from the pandemic and commodity prices rise, it remains unclear how aggressively companies will be in investing in the oilfield. In fact, according to the study, plowback percentages have been trending down for several years as capital markets shifted expectations of US shale from growth to returns.
"The higher prices of 2021, and the substantial cost-cutting of last year, have boosted 2021 earnings and illuminated three probable paths for E&Ps moving forward," said Fane. "While the integrateds seem more likely to use their capital to invest in decarbonization and alternative energies, many independents will be more likely to reinvest in their core business as oil and gas continues to be needed for decades to come. A smaller subset of companies may choose a path toward slow liquidation, returning capital to shareholders instead of investing for the future."