Questions

raised by results
Analyst themes of quarterly oil
and gas earnings
Q2 2016

Another round of
reductions in capex
budgets this quarter.
Lower costs are allowing
some projects to proceed.
However, the window of
opportunity is narrowing
for projects yet to reach
FID. The bottom of the
deflationary cost cycle
may have already been
reached.

Q2 2016 themes
Capital spending guidance moved up one place to top the ranking in the second
quarter. The main issue related to the flexibility that companies have to ramp up, or
down, capital spending in response to oil price movements. During the quarter, some
companies announced further reductions to their capex budgets for 2016 and 2017.
These fresh cuts, on top of the previously announced reductions, raise concerns over
whether planned investment levels are sufficient for the industry to sustain production
growth longer term.
Many capital projects were delayed while companies sought to restructure them to
capture additional value. However, the window to take advantage of lower service
and equipment costs could be closing. We may have reached the bottom of the
deflationary cost cycle. Some oilfield services companies signalled in their earnings
calls that they will push back on further price concessions.
Production outlook moved up to second place in the ranking in Q2. Unplanned global
oil supply disruptions reached the highest level in five years during the quarter.
Predictions of future supply are being revised more frequently. Geopolitical events,
lower opex and capex spend, a lack of OPEC cohesion and uncertainty about the
flexibly of US shale production are just some of the moving parts. A more stable
pricing equilibrium, and lower price volatility, will be elusive until market participants
better understand how US shale responds to price signals. The theme of Cash flow
targets remained stable in fourth spot in the second quarter. Most companies remain
committed to preserving the dividend. Although at US$40 oil, cash flows generated
may not be enough to fund the dividend and maintain capital investment.
The theme of Refining margins registered the greatest movement in the ranking,
rising to sixth place. Some companies reported Q2 earnings that undershot consensus
expectations. Earnings were weaker despite oil prices being a third higher on average
than the previous quarter. Results from downstream businesses had insulated
integrated companies from the full impact of the price crash. As refiners ran plants at
higher utilization levels, the inventory of oil products swelled. The oil supply glut has
been turned into a refined products glut. Without a rebound in demand, the outlook
for Refining margins is weaker in most markets. Unhedged integrated players with less
advantaged refining portfolios will take a hit from lower margins in their second half
earnings.
Adi Karev
Global Sector Leader, Oil & Gas

Top 10 themes from quarterly

earnings calls
Q2 2016

new

Q1 2016

Capital spending guidance

Portfolio optimization

Production outlook

Capital spending guidance

Portfolio optimization

Major projects

Cash flow targets

Cost reduction

Major projects

Cash flow targets

Refining margins

Production outlook

Cost reduction

Operational excellence

Shareholder distributions

Shareholder distributions

LNG market developments

Refining margins

10

Tax trends

10

LNG market developments

Key themes
Capital spending guidance

This theme relates to the flexibility

that companies have to ramp up or
down their capital expenditure in
response to market conditions. Key issues
raised on capital expenditure include:

The proportion of capital investment

committed for 2016/17 and the share
that remains flexible
The likelihood of capital investment being
reduced further if oil and gas prices
remain low
The projects or final investment decisions
that could be deferred if further cuts to
capital spend are required
Whether the level of planned capital
investment is sufficient to sustain
production growth longer term or
replenish the portfolio

The flexibility to raise capital expenditure

if oil markets rebalance quickly
Whether the reduction in capital spend
reflects lower activity or cost deflation in
services and equipment
If reductions in capex are temporary or
represent a more permanent shift
Reasons for capex trending below
guidance and any changes to
full-year targets

Greater collaboration across the industry could support the development of the next generation of smaller, low-cost modular projects
that are more likely to attract financing in the current environment.
Gary Donald, EY Global Oil & Gas Assurance Leader

| Questions raised by results Q2 2016

Production outlook

This theme relates to targeted

production levels and factors that
may impact a companys ability
to grow production. Key issues raised on
production outlook include:

Portfolio optimization

This theme relates to questions

on progress towards targets for
disposals or acquisitions and
the appetite for further asset sales or
purchases. It includes observations on
the state of M&A markets. Additionally, it
incorporates issues of portfolio balance
and exposure to particular asset classes.
Key issues raised on portfolio optimization
include:

Cash flow targets

This theme relates to the balance

between sources and uses of cash.
Key issues raised on cash flow
include:

Guidance on 2016 production and

activity levels, particularly in US
shale basins

Whether cuts to capital expenditure will

result in higher underlying production
decline rates

The impact of planned and unplanned

outages and field shutdowns on
production

The impact of asset sales on

production volumes

Views on the environment for

transactions and whether bid-ask spreads
have narrowed

Scope for additional asset sales beyond

those previously announced

The ability to achieve disposal targets

with the large volume of assets on
the market
Parts of the business that disposals are
likely to come from

Identification of one-time reasons for

variations in cash flow quarter-on-quarter
and full year guidance
The oil price that is required to balance
sources and uses of cash

The number of rigs required to maintain

US shale production at current levels

Appetite for selective bolt on acquisitions

or large scale M&A in preparation for a
rebound in oil prices
The attractiveness of entry into specific
new geographies or plays

Whether companies will be able to cover

capital expenditure commitments and
shareholder returns from cash flows
in 2016
The intentions for the first call on cash in
the event of a recovery in oil prices

The low oil price environment has seen cash flows and asset values decline relative to existing borrowings. Companies do not
necessarily have strong organic cash flows to fund capital projects and existing providers of capital may not wish to extend further
finance. This is leading companies to explore alternative sources of capital.
Andy Brogan, Global Oil & Gas Transactions Leader

Major projects

This theme relates to the execution

of major projects and the pipeline of
capital projects. Key issues raised on
major projects include:

The breakeven oil price for unsanctioned

capital projects
Whether final investment decisions are
expected on any major projects in the
short-term
Update on the status of planned new
project start-ups

Refining margins

This theme relates to reasons for

deviations in margins from industry
marker levels. Key issues raised on
refining margins include:

Plans to accelerate any projects to take

advantage of deflation in oilfield
service costs
The performance relative to expectations
of major projects that have recently
become operational

Factors that contributed to higher or

lower margins and if they are sustainable

The global supply and demand of refined

products and the margin outlook

Plans to reduce refining runs if

margins soften

The sensitivity of earnings to changes in

refining margins

Higher plant utilization levels have resulted in rising refined product stocks. With a weaker margin outlook, companies with less
advantaged plants will need to improve their competitive position. Some operators may need to consider cuts to runs or plant closures.
A focus on operational excellence can help companies improve their plant reliability and cost efficiency in a lower margin environment.
Axel Preiss, Global Oil & Gas Advisory Leader

Questions raised by results Q2 2016 |

Cost reduction

This theme relates to actions

companies have taken to reduce
costs and trends in the cost of
equipment and services. Key issues raised
on cost reduction include:

Shareholder distribution

This theme relates to a companys

strategy on shareholder returns,
any changes to that strategy and
potential constraints on delivery. Key issues
raised on shareholder distributions include:

LNG market developments

This theme relates to LNG project

performance and the outlook for
supply, demand, contracting activity
and pricing. Key issues raised on LNG
market developments include:

new

Tax trends

10

This theme relates to expected

tax rates and costs and also
government fiscal policies. Key
issues raised on tax trends include:

Progress against previously announced

cost reduction targets
Scope for further reductions in operating
costs in 2016 and 2017
The split between savings achieved from
company actions, lower activity levels and
industry deflation

The sustainability of lower operating costs

Expectations of when the deflationary
cycle will bottom out
The potential for cost savings to impact
safety or restrict future
production growth

The sustainability of a dividend

growth strategy

The ability and resolve to fund the

dividend in a sustained low oil price
environment
The priorities for cash shareholder
pay-outs or reinvestment and returns to
investors through growth
Whether, due to the weaker demand
environment, customers have been
requesting more flexible terms in longterm contracts or price renegotiations

The appetite for further exposure to LNG

markets given the weak
short-term outlook

Any flexibility on fiscal terms being

offered by host governments due to low
oil and gas prices

Guidance on underlying tax rates for

the remainder of the year given oil price
volatility

EY contacts
Adi Karev
EY Global Oil & Gas Leader
+852 2629 1738
adi.karev@hk.ey.com

Gary Donald
EY Global Oil & Gas
Assurance Leader
+44 20 7951 7518
gdonald@uk.ey.com

Andy Brogan
EY Global Oil & Gas
Transactions Leader
+44 20 7951 7009
abrogan@uk.ey.com

Deborah Byers
EY Energy Market Segment
Leader-Southwest Region
+1 713 750 8138
deborah.byers@ey.com

Sanjeev Gupta
EY Oil & Gas Asia-Pacific
Transactions Leader
+65 65 357 777
sanjeev-a-gupta@sg.ey.com

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 Q2
2016 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
held from 20 to 29 July 2016.

For this analysis, the following companies were included:

Husky Energy Inc

Repsol SA

BP plc

Royal Dutch Shell plc

Chevron Corporation

Statoil ASA

ConocoPhillips

Suncor Energy Inc

Eni SpA

TOTAL S.A.

Exxon Mobil Corporation

Woodside Petroleum Ltd

EY | Assurance | Tax | Transactions | Advisory

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