US E&Ps likely to provide assurance in Q3 calls amid uncertain upstream landscape

Houston — US upstream companies will likely try to provide assurance of capital discipline, higher returns and limited production growth amid ongoing uncertainty in the current upstream landscape during third-quarter conference calls that roll out later this month.

But analysts caution not to expect fireworks as long as oil prices persist around $40/b.

Third-quarter calls typically highlight a look-ahead into the following year's plans. But the upcoming crop will be especially scrutinized as industry and the world continue to grapple with the coronavirus pandemic which have decimated oil demand and caused prices to plummet to levels lower on average than they've been in years.

While Wall Street hungers for signs of improving fundamentals that could kick-start activity, the information they receive from upstream executives might not be too newsy, analyst Matt Andre, of S&P Global Platts Analytics, said.

"I'm not sure Q3 will provide a ton [of information] on 2021," Andre said. "We'll probably continue to see terms like 'maintenance mode.' 'capital discipline,' and 'efficiency push to maximize returns'," Andre said.

"This $40/b world is going to make it tough for operators to do much other than [complete already-drilled] wells in top acreage to bring online," he said, adding that it will take $45/b-$50/b to "promote growth" in output.

US producers are likely to steer a conservative course for 2021 capex, while emphasizing their ability to generate cash flow in the current $40/b WTI oil environment, analysts said. And while prices have recovered from March-April lows in the teens and $20s/b, and Q3 results won't be stellar, they will show improvement from a dismal Q2.

There is also more clarity in the sector right now about what is important to producers, which have given periodic updates around continued efficiencies and lower costs, minimized expenditures and maximized cash flows at current prices. And, they will show minimal production growth since hyped-up output has caused recurrent oil price volatility in recent years and worked against an underlying build in value.

Status quo 'best-case scenario'

So for now, "status quo looks to be the best-case scenario," Stephen Richardson, an analyst with Evercore ISI, said of what he expected from Q3 calls.

"Look for producers to assuage any concern that rising prices will be met by rising activity in 2021 as the market continues to enforce discipline," Richardson said in an Oct. 12 investor note.

RBC Capital Markets analyst Scott Hanold noted the vast blow that has been dealt the industry in 2020: the names in his E&P coverage universe have lost a collective $123 billion, or 50%, of market cap since the start of the year and the sector has posted a total 36 bankruptcies.

To capture the attention of a dwindling investor universe, operators will be required to do more with less money than ever before – and will probably spend most of their Q3 calls demonstrating how they plan to do it, Hanold said in an Oct. 11 investor note.

"Operators need to deliver on all fronts...maintain production, de-lever, and generate positive free cash flow in the current price environment," he said.

"We don't anticipate formal budgets [to be unveiled in Q3] but we expect many companies will provide a path for 2021 that is mostly maintenance level spending," he added.

Little appetite for growth right now

While operators and investors agree the macro outlook for 2021 is improving, "there is little appetite for acceleration into an improving strip," Hanold added.

In the final quarter of 2020, E&P companies at least appear more confident than in the year's first half. Operators, each in its own way, found a navigation route through the chaos of March through Q2 2020 when they were suddenly faced with unprecedented instability in crude prices and oil demand from the pandemic. They are now following through with austerity programs set earlier in the year.

Even before Q3 had ended, some E&Ps released operations previews showing progress in coping with lower prices and outlined goals that will doubtless be talking points on quarterly calls.

ConocoPhillips, for example, said Sept. 30 that its Q3 production would likely be down 20% to 1.050 million b/d-1.070 million boe/d compared to the same quarter in 2019, owing mainly to Q2 output curtailments although much of those are now fully restored.

Also, Marathon Oil Oct.1 gave its projected 2021 maintenance capital budget of $1 billion, saying it could keep production flat on that spending level even at an oil price below $35/b. The company said it will keep a tight rein on spending even if prices rise beyond $50/b, which in recent years was industry's conservative benchmark for basing capex. Production growth "would be capped at 5% even in higher-price environments," Marathon CEO Lee Tillman said.

Evercore's Richardson quipped: "Best of luck finding a unique trend or theme that can drive E&P stock performance into Q3 prints...where the industry will show a restart in activity and make promises about how the next cycle will be different."