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Questions
raised by results
Analyst themes of quarterly
oil and gas earnings
Q4 2018
Overview of Q4 2018 themes
•	 Even as oil prices fell abruptly and natural gas prices remained in a narrow range, the macro
environment and oil prices continue to reside at the bottom of our list of themes. Apparently, the
investment community sees the interruption in the commodity price recovery as a bump in the road
rather than a longer-term problem. Operating income of our sample of 12 companies has shown
remarkable strength and resilience. Although Q4 profits were 28% lower than Q3, they were 45%
higher than in Q4 of 2017. It may be that analysts see what we see: an industry that has adapted and
will continue to adapt to whatever the market throws at it. Costs are lower than ever and execution,
aided by the rise of digitalization, continues to improve. Companies are closely managing their
portfolios. We expect those trends to continue.
•	 “Business as usual” on execution seem to be the dominant thinking. The fundamentals of cost control,
capital spending, operational excellence, cash flow and capital return were front and center. Analysts
were keen to learn the details of individual projects from a cost and performance standpoint.
•	 LNG projects were a topic of interest for more companies this quarter. The surge in LNG demand,
the widening of LNG spreads and a general sense oil and gas majors will play an increasing role in
the production and marketing of LNG have created more awareness of companies’ plans for putting
capital into that part of the oil and gas value chain.
•	 Country risk is always a factor for IOCs, both from a portfolio management and operational
perspective. Companies with exposure to the deteriorating political situation in Venezuela were asked
questions about plans, contingencies and the impact on operations and earnings.
•	 Acquisitions, capital spending and the return on capital remain of primary interest. There was some
reshuffling of the financial themes, but it would surprise us if any of them fell off the radar completely.
Growth versus returns are always in tension and it seems the balance has tipped in favor of a focus
on returns.
•	 In the last five years, the oil and gas industry agenda has been dominated by a short-term challenge
of structurally low oil prices and the longer-term specter of climate change, decarbonization of the
energy ecosystem and peak oil demand. It is revealing that in the latest round of conversations
between company management and investors, those subjects weren’t dominant. In fact, they
were discussed only in passing. A small number of analysts were interested in alternative energy
investments, but those queries were few and far between and focused on returns.
•	 In future quarters we expect to see increasing interest in LNG investments, consolidation in North
American shale (and acquisition), and pressure on service pricing and costs as the service sector
comes to terms with returns that have yet to recover. Commodity prices may become more
interesting but there could be a shift in the direction of causation as oil company strategy moves the
markets, rather than the other way around.
Andy Brogan
EY Global Oil & Gas Leader
The oil and gas
industry started
the fourth quarter
of 2018 with high
hopes. Oil prices
had risen in the
last half of the
third quarter and
indicators were
pointing upward.
As is often the
case, events took
over and oil prices
erased all the
gains made since
the beginning
of 2017.
Top 10 themes from quarterly
earnings calls
Q4 2018 Q3 2018
1 Portfolio optimization
2 Major project updates
3 Cash flow targets
4 Capital spending guidance
5 Cost control
6 Shareholder distributions
7 Maintenance turnaround
8 Operational excellence
9 Production outlook
10 Macro outlook
1 Capital spending guidance
2 Major project updates
3 Cash flow targets
4 Portfolio optimization
5 Production outlook
6 Shareholder distributions
7 Cost control
8 Downstream performance
9 Maintenance, expansion and turnaround
10 Macro outlook
Key themes
Portfolio optimization
Issues of portfolio balance and
exposure to particular asset
classes as well as the appetite
for asset sales or purchases.
1
“Although oil prices continue to remain lower, we see higher levels of confidence among operators, driven by better cash flows and higher
operating incomes. We expect a focus on projects with short cycles, growing demand and better price spreads combined with inherently
lower risk. Bets on shale and LNG appear highly attractive with divestments likely from lower performing conventional resources.”
Andy Brogan, EY Global Oil  Gas Leader
•	 ►	Asset portfolios were in focus again
as the top theme in Q4 2018 (up from
fourth in the last quarter).
•	 ►	Producers are preparing for the long-
term scenarios for oil and gas and are
aggressively scouting sources of lower-
cost crude and LNG capacity.
•	 ►	The US continues to generate interest
as a hot-spot for asset acquisitions
as it offers both. In addition, greater
portfolio optionality is being built
through gradual investments in power
generation and mobility by the majors.
Major project updates
The execution of current
projects and the pipeline of
future projects.2
•	 ►	Market volatility toward the end of 2018
is expected to have a direct impact on
project FIDs.
•	 ►	A relook at the project approval process,
considering the emerging macro
conditions is likely, as companies factor
in volatility.
•	 ►	Unwavering Asian LNG demand (due to
coal-to-gas switching initiatives in major
importing nations) is expected to put
liquefaction project FIDs in the spotlight.
Cash flow targets
Balance between sources
and uses of cash.
3
•	 ►	The oil and gas sector is no exception to
the rule that “cash is king.”
•	 ►	The generation of cash, the use of cash
and the return of cash to shareholders is
always top of investors’ minds.
•	 ►	With healthy cash positions shareholder
distributions and dividend increases
appear to be sustainable.
2 | Questions raised by results Q4 2018
Cost control
Actions companies have taken
to reduce costs, and trends in
the cost of equipment
and services.
•	 ►Thelynchpinofearningsrecoveryandthe
resilienceofoilandgascompanies’results
duringchallengingmarketenvironments
hasbeentheirfocusoncostsandtheir
successinbringingcostsdown.
•	 Possibleeffectsonoperatingexpenditure
fromprojectstartsandacquisitionsmade
intherecentpastwereinfocus.
•	 Thepotentialforfurtherreductionsin
operatingcostsbystreamliningand
possiblereductioninactivitylevelsinthe
USLower48werealsoofinterestaswere
initiativesthathaveenabledoperating
costsreductions.
5
Capital spending guidance
Companies’ flexibility to
ramp up or down their capital
expenditure in response to
market conditions.
•	 ►	Adherence to capital targets and plans
has been impressive, and comprehensive
details on planned spending have been
charted out by producers.
•	 ►	Despite reporting strong balance sheets
because of the measures taken over the
years, a disciplined approach to capital
spending appears to be the new normal.
4
•	 ►	With a firm commitment to capital
discipline and doubts about the role
of oil and gas, we can expect heighted
competition for cash between capital
projects and return of capital to
shareholders.
Shareholder distributions
Companies’ strategy
for returning capital to
shareholders, changes to
that strategy and potential
risks to delivery.
•	 ►	A hint that analysts have taken note of
the recent fall in oil prices is the interest in
share buybacks and dividend policies.
•	 ►	Many companies had announced buyback
programs and as risk around revenues,
earnings and cash flows increases, those
programs could be reconsidered, and
analysts are looking for signals.
•	 ►	Questions were asked about breakeven
prices and conversely, the impact of price
volatility on shareholder distributions.
•	 ►	The priorities for cash – shareholder pay-
outs, debt repayment or reinvestment
and factors that would trigger share
buybacks are always interesting to
analysts.
6
7
Maintenance and
turnaround
Management of planned
and unplanned maintenance
activities.
•	 ►	The efficiency of scheduled maintenance
and the risk that maintenance may be
delayed or that costs could increase can
have significant impact on earnings and
cash flow.
•	 ►	Capacity additions, timelines, new
technology and capital involved in
expansion projects are routinely high on
analysts’ agenda.
•	 ►	In particular, the details of how upcoming
maintenance plans and the timeline for
facility restarts will impact output are the
subject of some scrutiny.
Operational excellence
Sustaining customer
expectation through the
continuous improvement of
the operational processes
and the culture of the
organization.
•	 ►	In a highly competitive commodity
business, execution is everything.
•	 ►	Analysts were keen to learn more
about technology being implemented
or considered and the portion of
increased returns that are attributable to
technology implementation.
•	 ►	Obstacles to widespread implementation
of automation and digitalization in
operations were also a subject of
significant interest.
•	 ►	Analysts were also curious about safety
as a strategic high-priority and the
efforts underway to enhance safety
processes.
8
“In the current commodity pricing scenario, top line growth for the oil and gas sector is likely to be under pressure, challenging
companies to keep their costs under control. Digitalization will continue to drive the next wave of operational cost reduction initiatives
and we can expect a tighter hold on the purse strings for service pricing and non-critical expenditure.”
Jeff Williams, EY Global Oil  Gas Advisory Leader
“Forecasts of a modest commodity price recovery imply that the industry would place an increased focus and rigor on operations
performance. Digitalization, data gathering and sophisticated analytics can help better understand cost drivers across the value chain
and their interdependencies. We can expect improved decision making and efficiencies deriving from ongoing and new digital projects.”
Ioanna-Andreea Ene, EY Nordics Oil  Gas OPEX Leader
3Questions raised by results Q4 2018 |
Production outlook
Targeted production levels
and factors that may impact
a company’s ability to grow
production.
•	 ►	Attention to production will always be
there in some degree.
•	 ►	This quarter, the extent of contribution
from non-Permian shale to production
targets and the associated timelines were
of particular interest.
•	 ►	Plans and targets for production from
riskier countries such as Venezuela and
Libya were questioned.
•	 ►	Other interesting production-focused
topics were the impact from curtailments
in Alberta, strategies to balance volume
growth with returns considering the
projected softening in demand and the
contribution of recent major project
start-ups to production.
9
Scope, limitations and
methodology of the review
The purpose of this review is to examine the key themes arising
from the questions asked by analysts during the Q4 2018 earnings
reporting season among 12 global oil and gas companies.
The identification of the top 10 themes is based solely on an
examination of the transcripts of the earnings conference calls.
For this analysis, the following companies were included:
EY contacts
Derek Leith
EY Global Oil  Gas Tax Leader
+44 12 2465 3246
dleith@uk.ey.com
Andy Brogan
EY Global Oil  Gas Leader
+44 20 7951 7009
abrogan@uk.ey.com
Gary Donald
EY Global Oil  Gas Assurance Leader
+44 20 7951 7518
gdonald@uk.ey.com
Jeff Williams
EY Global Oil  Gas Advisory Leader
+1 713 750 5916
jeff.williams@ey.com
Connect with us
Visit us on LinkedIn.
Follow us on Twitter @EY_OilGas.
See us on YouTube.
BP plc
Chevron Corporation
ConocoPhillips
Eni SpA
Exxon Mobil Corporation
Husky Energy Inc
Repsol SA
Royal Dutch Shell plc
Equinor ASA
Suncor Energy Inc
TOTAL S.A.
Woodside Petroleum Ltd
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory services. The
insights and quality services we deliver help build trust and confidence in the
capital markets and in economies the world over. We develop outstanding
leaders who team to deliver on our promises to all of our stakeholders. In so
doing, we play a critical role in building a better working world for our people, for
our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the
member firms of Ernst  Young Global Limited, each of which is a separate legal
entity. Ernst  Young Global Limited, a UK company limited by guarantee, does
not provide services to clients. For more information about our organization,
please visit ey.com.
How EY’s Global Oil  Gas Sector can help your business
The oil and gas sector is constantly changing. Increasingly uncertain energy
policies, geopolitical complexities, cost management and climate change
all present significant challenges. EY’s Global Oil  Gas Sector supports a
global network of more than 10,000 oil and gas professionals with extensive
experience in providing assurance, tax, transaction and advisory services across
the upstream, midstream, downstream and oil field subsectors. The Sector
team works to anticipate market trends, execute the mobility of our global
resources and articulate points of view on relevant sector issues. With our deep
sector focus, we can help your organization drive down costs and compete more
effectively.
© 2019 EYGM Limited.
All Rights Reserved.
EYG no. 001410-19Gbl
BMC Agency
GA 1010663
ED None
This material has been prepared for general informational purposes only and is
not intended to be relied upon as accounting, tax or other professional advice.
Please refer to your advisors for specific advice.
ey.com/oilandgas/quarterlytrends
Macro outlook
Macro factors and
their impact.
•	 ►	Global oil and LNG markets are at the
same time crucially important and highly
unpredictable.
•	 ►	Usually the concerns are short-term and
tied to recent volatility.
•	 ►	This quarter, the effect of technology and
policy developments on the long-term oil
and gas market outlook were in focus.
•	 ►	Specific points of interest were views
on the growth projections of the LNG
markets in Asia and their effect on the
global supply-demand dynamics and
Canadian crude oil market dynamics
because of the production curtailments.
10

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Analyst themes of quarterly oil and gas earnings Q4 2018

  • 1. Questions raised by results Analyst themes of quarterly oil and gas earnings Q4 2018 Overview of Q4 2018 themes • Even as oil prices fell abruptly and natural gas prices remained in a narrow range, the macro environment and oil prices continue to reside at the bottom of our list of themes. Apparently, the investment community sees the interruption in the commodity price recovery as a bump in the road rather than a longer-term problem. Operating income of our sample of 12 companies has shown remarkable strength and resilience. Although Q4 profits were 28% lower than Q3, they were 45% higher than in Q4 of 2017. It may be that analysts see what we see: an industry that has adapted and will continue to adapt to whatever the market throws at it. Costs are lower than ever and execution, aided by the rise of digitalization, continues to improve. Companies are closely managing their portfolios. We expect those trends to continue. • “Business as usual” on execution seem to be the dominant thinking. The fundamentals of cost control, capital spending, operational excellence, cash flow and capital return were front and center. Analysts were keen to learn the details of individual projects from a cost and performance standpoint. • LNG projects were a topic of interest for more companies this quarter. The surge in LNG demand, the widening of LNG spreads and a general sense oil and gas majors will play an increasing role in the production and marketing of LNG have created more awareness of companies’ plans for putting capital into that part of the oil and gas value chain. • Country risk is always a factor for IOCs, both from a portfolio management and operational perspective. Companies with exposure to the deteriorating political situation in Venezuela were asked questions about plans, contingencies and the impact on operations and earnings. • Acquisitions, capital spending and the return on capital remain of primary interest. There was some reshuffling of the financial themes, but it would surprise us if any of them fell off the radar completely. Growth versus returns are always in tension and it seems the balance has tipped in favor of a focus on returns. • In the last five years, the oil and gas industry agenda has been dominated by a short-term challenge of structurally low oil prices and the longer-term specter of climate change, decarbonization of the energy ecosystem and peak oil demand. It is revealing that in the latest round of conversations between company management and investors, those subjects weren’t dominant. In fact, they were discussed only in passing. A small number of analysts were interested in alternative energy investments, but those queries were few and far between and focused on returns. • In future quarters we expect to see increasing interest in LNG investments, consolidation in North American shale (and acquisition), and pressure on service pricing and costs as the service sector comes to terms with returns that have yet to recover. Commodity prices may become more interesting but there could be a shift in the direction of causation as oil company strategy moves the markets, rather than the other way around. Andy Brogan EY Global Oil & Gas Leader The oil and gas industry started the fourth quarter of 2018 with high hopes. Oil prices had risen in the last half of the third quarter and indicators were pointing upward. As is often the case, events took over and oil prices erased all the gains made since the beginning of 2017.
  • 2. Top 10 themes from quarterly earnings calls Q4 2018 Q3 2018 1 Portfolio optimization 2 Major project updates 3 Cash flow targets 4 Capital spending guidance 5 Cost control 6 Shareholder distributions 7 Maintenance turnaround 8 Operational excellence 9 Production outlook 10 Macro outlook 1 Capital spending guidance 2 Major project updates 3 Cash flow targets 4 Portfolio optimization 5 Production outlook 6 Shareholder distributions 7 Cost control 8 Downstream performance 9 Maintenance, expansion and turnaround 10 Macro outlook Key themes Portfolio optimization Issues of portfolio balance and exposure to particular asset classes as well as the appetite for asset sales or purchases. 1 “Although oil prices continue to remain lower, we see higher levels of confidence among operators, driven by better cash flows and higher operating incomes. We expect a focus on projects with short cycles, growing demand and better price spreads combined with inherently lower risk. Bets on shale and LNG appear highly attractive with divestments likely from lower performing conventional resources.” Andy Brogan, EY Global Oil Gas Leader • ► Asset portfolios were in focus again as the top theme in Q4 2018 (up from fourth in the last quarter). • ► Producers are preparing for the long- term scenarios for oil and gas and are aggressively scouting sources of lower- cost crude and LNG capacity. • ► The US continues to generate interest as a hot-spot for asset acquisitions as it offers both. In addition, greater portfolio optionality is being built through gradual investments in power generation and mobility by the majors. Major project updates The execution of current projects and the pipeline of future projects.2 • ► Market volatility toward the end of 2018 is expected to have a direct impact on project FIDs. • ► A relook at the project approval process, considering the emerging macro conditions is likely, as companies factor in volatility. • ► Unwavering Asian LNG demand (due to coal-to-gas switching initiatives in major importing nations) is expected to put liquefaction project FIDs in the spotlight. Cash flow targets Balance between sources and uses of cash. 3 • ► The oil and gas sector is no exception to the rule that “cash is king.” • ► The generation of cash, the use of cash and the return of cash to shareholders is always top of investors’ minds. • ► With healthy cash positions shareholder distributions and dividend increases appear to be sustainable. 2 | Questions raised by results Q4 2018
  • 3. Cost control Actions companies have taken to reduce costs, and trends in the cost of equipment and services. • ►Thelynchpinofearningsrecoveryandthe resilienceofoilandgascompanies’results duringchallengingmarketenvironments hasbeentheirfocusoncostsandtheir successinbringingcostsdown. • Possibleeffectsonoperatingexpenditure fromprojectstartsandacquisitionsmade intherecentpastwereinfocus. • Thepotentialforfurtherreductionsin operatingcostsbystreamliningand possiblereductioninactivitylevelsinthe USLower48werealsoofinterestaswere initiativesthathaveenabledoperating costsreductions. 5 Capital spending guidance Companies’ flexibility to ramp up or down their capital expenditure in response to market conditions. • ► Adherence to capital targets and plans has been impressive, and comprehensive details on planned spending have been charted out by producers. • ► Despite reporting strong balance sheets because of the measures taken over the years, a disciplined approach to capital spending appears to be the new normal. 4 • ► With a firm commitment to capital discipline and doubts about the role of oil and gas, we can expect heighted competition for cash between capital projects and return of capital to shareholders. Shareholder distributions Companies’ strategy for returning capital to shareholders, changes to that strategy and potential risks to delivery. • ► A hint that analysts have taken note of the recent fall in oil prices is the interest in share buybacks and dividend policies. • ► Many companies had announced buyback programs and as risk around revenues, earnings and cash flows increases, those programs could be reconsidered, and analysts are looking for signals. • ► Questions were asked about breakeven prices and conversely, the impact of price volatility on shareholder distributions. • ► The priorities for cash – shareholder pay- outs, debt repayment or reinvestment and factors that would trigger share buybacks are always interesting to analysts. 6 7 Maintenance and turnaround Management of planned and unplanned maintenance activities. • ► The efficiency of scheduled maintenance and the risk that maintenance may be delayed or that costs could increase can have significant impact on earnings and cash flow. • ► Capacity additions, timelines, new technology and capital involved in expansion projects are routinely high on analysts’ agenda. • ► In particular, the details of how upcoming maintenance plans and the timeline for facility restarts will impact output are the subject of some scrutiny. Operational excellence Sustaining customer expectation through the continuous improvement of the operational processes and the culture of the organization. • ► In a highly competitive commodity business, execution is everything. • ► Analysts were keen to learn more about technology being implemented or considered and the portion of increased returns that are attributable to technology implementation. • ► Obstacles to widespread implementation of automation and digitalization in operations were also a subject of significant interest. • ► Analysts were also curious about safety as a strategic high-priority and the efforts underway to enhance safety processes. 8 “In the current commodity pricing scenario, top line growth for the oil and gas sector is likely to be under pressure, challenging companies to keep their costs under control. Digitalization will continue to drive the next wave of operational cost reduction initiatives and we can expect a tighter hold on the purse strings for service pricing and non-critical expenditure.” Jeff Williams, EY Global Oil Gas Advisory Leader “Forecasts of a modest commodity price recovery imply that the industry would place an increased focus and rigor on operations performance. Digitalization, data gathering and sophisticated analytics can help better understand cost drivers across the value chain and their interdependencies. We can expect improved decision making and efficiencies deriving from ongoing and new digital projects.” Ioanna-Andreea Ene, EY Nordics Oil Gas OPEX Leader 3Questions raised by results Q4 2018 |
  • 4. Production outlook Targeted production levels and factors that may impact a company’s ability to grow production. • ► Attention to production will always be there in some degree. • ► This quarter, the extent of contribution from non-Permian shale to production targets and the associated timelines were of particular interest. • ► Plans and targets for production from riskier countries such as Venezuela and Libya were questioned. • ► Other interesting production-focused topics were the impact from curtailments in Alberta, strategies to balance volume growth with returns considering the projected softening in demand and the contribution of recent major project start-ups to production. 9 Scope, limitations and methodology of the review The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q4 2018 earnings reporting season among 12 global oil and gas companies. The identification of the top 10 themes is based solely on an examination of the transcripts of the earnings conference calls. For this analysis, the following companies were included: EY contacts Derek Leith EY Global Oil Gas Tax Leader +44 12 2465 3246 dleith@uk.ey.com Andy Brogan EY Global Oil Gas Leader +44 20 7951 7009 abrogan@uk.ey.com Gary Donald EY Global Oil Gas Assurance Leader +44 20 7951 7518 gdonald@uk.ey.com Jeff Williams EY Global Oil Gas Advisory Leader +1 713 750 5916 jeff.williams@ey.com Connect with us Visit us on LinkedIn. Follow us on Twitter @EY_OilGas. See us on YouTube. BP plc Chevron Corporation ConocoPhillips Eni SpA Exxon Mobil Corporation Husky Energy Inc Repsol SA Royal Dutch Shell plc Equinor ASA Suncor Energy Inc TOTAL S.A. Woodside Petroleum Ltd EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst Young Global Limited, each of which is a separate legal entity. Ernst Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Oil Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2019 EYGM Limited. All Rights Reserved. EYG no. 001410-19Gbl BMC Agency GA 1010663 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/oilandgas/quarterlytrends Macro outlook Macro factors and their impact. • ► Global oil and LNG markets are at the same time crucially important and highly unpredictable. • ► Usually the concerns are short-term and tied to recent volatility. • ► This quarter, the effect of technology and policy developments on the long-term oil and gas market outlook were in focus. • ► Specific points of interest were views on the growth projections of the LNG markets in Asia and their effect on the global supply-demand dynamics and Canadian crude oil market dynamics because of the production curtailments. 10