About
102 global exploration and production oil companies earned almost $4.8 billion
from upstream production during the third quarter Q3 of 2016. According to the
United State Energy Information
Administration (EIA) report, even though this is considerably lower
compared with earnings from 2011 to 2014, earnings recovered from significant
losses that occurred throughout 2015 and the first half of 2016.
The
report said oil companies had recently increased price hedging activity that
along with higher earnings, could suggest companies were reducing price risk
with plans to increase investment and future production.
For example, Royal Dutch Shell Plc posted third-quarter Current Cost of Supplies (CCS) earnings of $1.4 billion, up from a loss of $6.1 billion for the same quarter a year ago.
Third-quarter
CCS earnings excluding identified items were $2.8 billion, up from $2.4 billion
for Q3 2015, due to increased production volumes mainly from BG Plc assets, lower operating expenses
more than offsetting the increase related to the consolidation of BG, and lower
well write-offs, Shell said.
Those
benefits were partly offset by the decline in oil, natural gas, and LNG prices,
and increased depreciation mainly resulting from the BG acquisition, and weaker
refining industry conditions. The companies in this study produced 33.9
million barrels per day (bpd) in Q3, accounting for about one-third of global
liquids production. The EIA said despite the decline in crude oil prices that
began in the Q3 2014, many producers have been able to maintain or slightly
increase production.
It
stated: “Production was slow to
decline because many projects that were approved for development between the
2011 and 2014 period did not begin production until 2015 or 2016, offsetting
natural declines from existing wells and cancellation of projects that were
more sensitive to lower prices.
“Over
the past two years, many companies recorded losses as they wrote down the value
of their assets called impairment -in the low-price environment. Impairment
reflects assets that have estimates of future net cash flows below what a
company has already spent to develop them. Impairments reduce earnings in the
quarter in which a company recognizes them, but are nonrecurring reductions.
“As
oil prices have traded between $40 per barrel (b) and $50/b since the second
quarter of 2016, impairments declined significantly from 2015 to 2016,
contributing to higher earnings from upstream production. Companies focused on
U.S. onshore operations—which experienced comparatively larger impairments than
other companies are beginning to see an increase in earnings: over one-half of
the companies focusing on U.S. onshore operations had positive earnings in the
third quarter of 2016, an increase from the first quarter of 2016 when only
nine per cent% of these companies recorded positive earnings.
“Companies
typically need to access external sources of capital, such as debt or equity,
to finance investment in projects that will increase production and operating
cash flows.”
EIA
added that the crude oil price decline significantly reduced cash flow for all
companies, and many U.S. onshore companies were at risk of defaulting on debt
payments or having their access to capital reduced.
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