Q4 2018 capped off a year of records in the US oil and gas exploration and production industry. Below, we track some of the recent record-breaking numbers, detail important macro trends, as well as key performance indicators important to the valuation of upstream oil and gas assets.
Oil & Gas Reserves
US crude oil proved reserves ended 2017 at 39.2 billion barrels, the largest in history and marking a 19% annual increase. This surpasses the previous record of 39 billion barrels set in 1970.
The 10-year period leading up to 2017 saw an astounding compound annual growth rate (CAGR) of 8.3% in proved crude oil reserves.
US Crude Oil Proved Reserves
10-Year US Crude Oil Proved Reserves Trends
US wet natural gas reserves ended 2017 at a record 464.3 trillion cubic feet (Tcf), an incredible 36% increase from 2016. This milestone marks the largest amount of reported reserves in US history. A key category contributing to the growth is that of associated gas, which is linked to record US oil production.
The past two years alone have seen a 123.2 Tcf increase, a 43% rise, with a CAGR of 6.9% over the past decade.
US Wet Natural Gas Proved Reserves
10-Year US Wet Natural Gas Proved Reserves Trend (Tcf)
Oil & Gas Production
On the back of reserves growth, US oil and gas production further continues its rise. Oil production in 2018 hit 10.74 million barrels per day (MMBLS/D), blowing past the almost 50-year-old record of 9.64 MMBLS/D set in 1970. Oil production has experienced a 9.6% CAGR since 2011. Similarly, dry natural gas production continues to make annual records, registering at 29.5 Tcf in 2018 and a 3.9% CAGR since 2011.
Annual US oil and gas production is expected to continue to produce record results for the foreseeable future following on the heels of historic proved reserves levels as a result of the unlocking of unconventional shale basins.
Some notable recently-published projections to pay attention to:
- US oil production is projected to peak at 14.53 MMBBLS/D in 2031, a 2.4% CAGR from 2018.
- Following its 2031 peak, an annual decline rate of 1.1% will lead 11.86 MMBBLS/D in 2050.
- US dry natural gas production is expected to continuously rise to 43.4 Tcf in 2050 with an annual growth of 1.2% over the period.
Total US Oil Production (MM barrels/day)
Total US Dry Natural Gas Production (Tcf)
Oil & Gas Prices
On the back of the United States becoming the world’s largest oil-producing country, as well as one of the most influential, volatility heightened and oil prices tumbled to the extent reminiscent of the 2014 crash.
Some key figures include:
- West Texas Intermediate (WTI) crude oil prices declined approximately 44% during Q4, from a high of $76 to a low of $42
- US oil rigs gradually increased over the past three and half years, ending 2018 at 885, a number not seen since 2015
- Natural gas prices bucked the trend and saw sustained levels close to $4 per million British thermal unit (BTU)
- US natural gas rigs ended the year at 198, nearing the 200-count not seen since 2015
It’s important to note rig count is a lagging indicator. The industry is taking a short-term wait-and-see approach to the nature and timing of price increases and declines. Drillers, however, continue to drill on their current contracts.
US Oil Rig Count vs. WTI Spot Price
US Gas Rig Count vs. Henry Hub Natural Gas Spot Price
Public US Upstream Companies’ Key Performance Indicators
US exploration and development companies with greater than $5 billion in enterprise value show the greatest scalability, or profitability and operationally, and lowest costs of capital.
Mid-tier companies enjoy respectable profitability and margin levels, as well as carry the highest leverage ratios.
The smallest US exploration and production companies, despite having the lowest relative profitability profile, demonstrate favorable cost control vis-à-vis production as compared to their mid-tier counterparts. Also, as expected, this category shows the highest cost of capital.
Upstream Oil & Gas Key Performance Indicators
Historical Costs of Capital
Exploration and production companies’ costs of capital rose across the board, with three notable figures:
- Volatility returned reflecting the more than 40% drop in oil prices in Q4 2018
- Borrowing rates ticked up
- Leverage ratios increased
Upstream E&P Companies: Historical Costs of Capital
We’re Here to Help
2019 is shaping up to be another interesting year as the United States continues to produce more crude oil and build on its recent record run. To learn more about these record-breaking numbers and how they may affect your business, contact your Moss Adams professional.