North American E&P Peer Group Analysis: 2Q 2015 pretax margins turn negative as revenues drop faster than costs

The large, midsize, small, oil-weighted, balanced and gas-weighted E&P peer groups have all reported negative 2Q 2015 pretax profit margins excluding hedging, suggesting such losses are likely to continue throughout this year. The resulting downward pressure on profit margins means the industry must continue to focus on cost cutting to generate profits.

• Our analysis of 49 North American E&Ps for 2Q 2015 finds that, despite reductions in operating costs, pretax profit margins for all peer groups have become negative, as upstream revenues fell faster than costs. Including hedging, the large, midsized and balanced E&P peer groups reported a positive median profit margin; excluding hedging, all peer groups had significant negative margins. The small and gas-weighted peer groups, which are also the companies with the highest debt, had the largest negative margins. As hedges roll off going into 2016, we expect continued profit margin erosion unless there are further cost reductions.
• The E&Ps with the best 2Q 2015 pretax profit margins excluding hedging are Occidental Petroleum, Apache, Cimarex Energy and Stone Energy. Strong hedges have enabled Devon Energy, SM Energy, Denbury Resources and PDC Energy to generate pretax profits in 2Q 2015. However, as hedges roll off in 2016, E&Ps that had second-quarter pretax losses when excluding hedging will struggle to generate profits unless commodity prices improve or they are able to slash costs.
• The industry has had success cutting costs this year. The median cash operating costs for the large, midsize and small E&P peer groups in 2Q 2015 dropped 13%, 8% and 20%, respectively, compared with full-year 2014.
• The E&Ps that cut costs the most so far this year are Suncor Energy, Canadian Natural Resources, Continental Resources, Cimarex Energy, Concho Resources, PDC Energy and Gulfport Energy.

17 November by Maral Ryzakuliyeva, Senior Analyst IHS Energy

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