ONE FOR THE HISTORY BOOKS
The downturn in the oil industry is finally over. More
companies are reporting profits than losses. Fewer firms
are filing for bankruptcy. Oil now trades above break-even
cost for most producers. Exploration budgets continue to
grow. The North American rig count has rebounded.
Permits to drill have risen dramatically. Layoffs have
slowed to a trickle. Crude inventories have fallen. U.S.
production is at an all-time high. And global demand
continues to grow.
In Q2/16, only five of the 25 largest energy firms in Houston
earned a profit.1 That’s not surprising, given that oil sank to
$26 per barrel the prior quarter. Share prices took a
beating as well. By mid-’16, they’d fallen 30 to 90 percent
from their peaks, with a 66 percent drop being the average.
The expression that oil prices would be “lower for longer”
was heard so often it became trite. But companies heeded
the warning, reducing headcounts, slashing budgets and
focusing on only the best prospects in their portfolios.
These steps helped the industry to regain its health. In
Q2/17, 16 of the 25 largest reported profits. In QQ2/18, 20
of the 25 largest were in the black.
The return to profitability has prompted firms to pay down
debt, increase dividends, launch share buyback programs,
and boost exploration budgets. Profitability has also lifted
stock prices, but not to pre-recession levels. In early
August, the shares of a third of the top 25 traded at 80 to
95 percent of their previous peak, a third at 50 to 80
percent, and a third at less than half their peak.
Share prices haven’t fully recovered for several reasons.
Investors worry about the impact that climate change
regulations will have on the industry. Some fear that oil
demand will peak in the not too distant future. Others are
disappointed in the meager returns received on their
energy investments, especially when compared to tech
stocks. They also worry that as oil prices rise, exploration
firms will focus on growing production, not profits.