Author: Mark Young

The combination of Cenovus Energy Inc. and Husky Energy Inc. will create one of North America’s top 10 producers.

Using production figures quoted by all publicly-quoted North American producers at the end of Q2, the merged Cenovus/Husky produced 660,000 boe/d in North America during the three months ended June 30, 2020.

At the end of June, Cenovus was the 13th largest producer in North America, while Husky was 35th (see note 1). Using Cenovus’s previous ranking as a starting point, the merger vaults the pairing five places higher into the top 10 and over fellow oilsands producer Suncor Energy Inc.

The top 10 ranking has been adjusted using the Evaluate Energy M&A database for deals that have taken place since the end of June. All figures quoted below assume deals that are currently in progress will all be completed.

M&A activity has also seen a major move of seven places up the rankings for ConocoPhillips. The company is currently working through the $13.4 billion (including debt) acquisition of Concho Resources Inc. in the U.S. and has already completed the $390-million acquisition of Montney production in Canada from Kelt Exploration Ltd. The two deals add around 334,000 boe/d to ConocoPhillips’s Q2 North American production of 526,000 boe/d, meaning it now ranks fifth among producers in the U.S. and Canada.

Devon Energy Corporation’s merger with WPX Energy Inc. means that combination will join Cenovus in rising five places in the rankings from Devon’s previous spot, while other key acquisitions by Chevron Corporation, Pioneer Natural Resources and Southwestern Energy see each of these acquirers move up too.

For more analysis on the Cenovus-Husky merger, visit our partners at the Daily Oil Bulletin at the following links:

• Cenovus-Husky deal creates new Canadian oil major
• Cenovus-Husky combination joins North America’s top 10 producers (includes charted data on top of data available in table below)
• Analyst has mixed view on logic of Cenovus-Husky merger
• Cenovus to cut up to 25% of workforce post-merger
• Where Cenovus-Husky deal ranks in top 10 Canadian deals

Top 20 North American producers (boe/d)

Source: Evaluate Energy F&O and Evaluate Energy M&A. All production is quoted after royalties where possible, except for Cenovus-Husky combination and the 51,000 boe/d addition of Painted Pony production to CNRL. Production outside of North America is not included in this table.

Note 1: The exact ranking pre- and post-merger for Cenovus and Husky is slightly murky, as the two producers only quote production on a pre-royalty basis, while every other producer in the table has been ranked based on post-royalty production for as fair a comparison across the entire group. This means that Cenovus and Husky production figures will be slightly higher than the other producers in the top 20, purely because they are reported on a different basis. Husky’s production in Asia is not included in any of the analysis above.

Update: 28/10: Chevron agreed a deal to sell its 450 mmfe/d (75,000 boe/d) Appalachian Basin assets to EQT Corp for $735 million. Chevron’s ranking in the table was unaffected, but assuming the deal completes then EQT would leapfrog the Cenovus-Husky combination into 8th place with the extra production.

Painted Pony Energy Ltd. was one of North America’s highest cost natural gas producers prior to its acquisition by Canadian Natural Resources Ltd. (CNRL) in October, based on fresh data from Evaluate Energy.

This analysis was conducted using Q2 2020 operating and transportation expenses per barrel (“production costs”) for some of the most heavily gas-weighted, publicly listed producers in Canada and the United States.

Click here for a free download of production cost data for all 20 companies in this analysis

In summary:

• All 20 companies produced over 10,000 boe/d in Q2 2020.
• The companies were selected for this natural gas cost analysis because their portfolios were among the more heavily gas-weighted among companies producing at least 10,000 boe/d in Q2 2020. This avoids oil and liquids production skewing the analysis.
• The companies produced in North America only; oilsands producers were excluded.
• U.S. production tax costs are excluded; so, too, are Canadian royalty expenses.

Low cost production is a key indicator that investors will be looking at to help identify healthy gas producing companies in the current climate. For more on the low cost producers of the group, click here.

The most recent production cost data and key conclusions are presented below.

Source: Evaluate Energy

Overall portfolios must be considered

The trend line on the chart, calculated using the production costs of all companies in the group, shows that as oil weighting increases, so does the average cost per barrel of oil equivalent to produce for each company.

Therefore, if one company was producing at $2/boe higher than another this might not make it a “higher cost operator”. It may be because oil makes up a higher proportion of its portfolio.

To illustrate this we examined costs reported both by Cabot Oil & Gas (COG) in the U.S. Appalachian Basin and Crew Energy (CR), a Montney-producer in Canada.

• On the face of it, it appears that Crew is a much higher cost operator at $6.82/boe compared to Cabot’s $4.51/boe.
• In fact, both companies sit almost exactly on the trend line, meaning that Crew’s higher cost per boe can be attributed almost entirely to the higher percentage of liquids in its portfolio.

Examining costs per boe alone can be misleading. When deciding if a company is a producer with high production costs, these metrics must be considered relative to the company’s overall portfolio.

Based on the combined metrics of costs per boe and each company’s oil weighting, we have identified the highest cost producers based on Q2 2020 data.

Highest cost natural gas producers

At around $9.00/boe, Painted Pony Energy Ltd. (PONY) was the highest cost operator relative to its portfolio in Q2 2020. Its costs – almost a full $4.00/boe over the trend line – increased in 2020 after around $2.30/boe related to capital facility fees appeared in its income statement. This relates to certain finance lease obligations in February 2020 now recognized as operating not finance expenses. Canadian Natural Resources finalized its acquisition of Painted Pony in October, stating that Painted Pony’s assets would complement CNRL’s natural gas portfolio in key areas and provide opportunities for cost synergies via pre-built infrastructure and transportation.

Chesapeake Energy (CHK) recorded the highest cost per boe at $9.40, due to high costs associated with its NGL production. Fellow Appalachian Basin producer EQT Corp. (EQT) recorded the cost furthest from the trend line among U.S. gas producers. EQT’s $7.49/boe was around $2.50/boe higher than the trend line’s expected production costs for a company with a portfolio comprised of 6% liquids. EQT’s costs can be attributed to relatively high processing costs compared to other producers in the peer group.

Among the other Canadian companies, Alberta-focused Pine Cliff Energy (PNE) registered the highest cost after Painted Pony’s $9.00/boe at $8.60/boe. Among the costs included in this analysis, Pine Cliff’s highest costs are its operating expenses, which made up 88% of its production costs in Q2.

Click here for a free download of production cost data for all 20 companies in this analysis

Evaluate Energy data allows a comprehensive review of liquidity and company health. Alongside these production cost metrics, data includes debt and interest measures, credit availability figures, hedging portfolios and earnings guidance.

Canada’s Peyto Exploration and Development and ARC Resources rank among North America’s lowest-cost natural gas producers, according to the latest data from Evaluate Energy.

This analysis was conducted using Q2 2020 operating and transportation expenses per barrel (“production costs”) for some of the most heavily gas-weighted, publicly listed producers in Canada and the United States.

Click here for a free download of production cost data for all 20 companies in this analysis

In summary:

• All 20 companies produced over 10,000 boe/d in Q2 2020.
• The companies were selected for this natural gas cost analysis because their portfolios were among the more heavily gas-weighted than other companies producing at least 10,000 boe/d in Q2 2020. This avoids oil and liquids production skewing the analysis.
• The companies only produced in North America and oilsands producers were excluded.
• Production tax costs in the U.S. are excluded, as are royalty expenses in Canada.

Low cost production is just one key indicator that investors and industry observers will be looking for to identify healthy gas producing companies in the current climate. For more on the higher cost producers in the group, click here.

The most recent production cost data and key conclusions are presented below.

Source: Evaluate Energy

Overall portfolios must be considered

The trend line on the chart, calculated using the production costs of all companies in the group, shows that as oil weighting increases, so does the average cost per barrel of oil equivalent to produce for each company.

Therefore, if one company was producing at $2/boe higher than another this might not make it a “higher cost operator”. It may be because oil makes up a higher proportion of its portfolio.

To illustrate this we examined costs reported both by Cabot Oil & Gas (COG) in the U.S. Appalachian Basin and Crew Energy (CR), a Montney producer in Canada.

• On the face of it, it appears that Crew is a much higher cost operator at $6.82/boe compared to Cabot’s $4.51/boe.
• In fact, both companies sit almost exactly on the trend line, meaning that Crew’s higher cost per boe can be attributed almost entirely to the higher percentage of liquids in its portfolio.

Examining costs per boe alone can be misleading. When deciding if a company is a producer with high production costs, these metrics must be considered relative to the company’s overall portfolio.

Based on the combined metrics of costs per boe and each company’s oil weighting, we have identified the lowest cost producers based on Q2 2020 data.

Lowest cost natural gas producers

At just $2.32/boe, Alberta Deep Basin producer Peyto Exploration & Development (PEY) recorded the lowest production costs. They were also the lowest cost relative to the trend line of all 20 producers. The trend line anticipates production costs between $5.50-$6.00/boe for a company like Peyto with a portfolio of 14% liquids.

Comstock Resources (CRK) was the lowest cost U.S.-based producer of the group at $2.91/boe. Only two companies (Cabot and Goodrich Petroleum) produced a lower level of liquids relative to their portfolios. While Comstock hovers around $1.50/boe below the trend line, the majority of its low costs can be attributed to the high natural gas weighting of its Texas and Louisiana production base.

After Peyto, the next furthest from the trend line in terms of low costs is Canadian producer ARC Resources (ARX). Its Q2 2020 production costs in the Montney and Pembina Cardium of $4.50/boe are around $2/boe below the expected costs for a portfolio comprised of 23% liquids.

Of the remaining low-cost U.S. producers, Eagle Ford-focused Silverbow Resources recorded production costs of $4.45/boe in Q2 2020, a comparable distance of around $1.50/boe from the trend line to Comstock Resources.

Click here for a free download of production cost data for all 20 companies in this analysis

Evaluate Energy data allows a comprehensive review of liquidity and company health. Alongside these production cost metrics, data includes debt and interest measures, credit availability figures, hedging portfolios and earnings guidance.

 

Debt levels spiked among E&P companies during Q2 according to the latest analysis by the U.S. Energy Information Administration, illustrating the immediate impact of reduced oil demand and prices on the sector.

The EIA Financial Review for Q2 2020 is based on data extracted via EIA’s Evaluate Energy subscription.

It can be downloaded in full at this link.

From its Q2 analysis of 102 E&P companies globally, the EIA also found that:

• Cash from operations fell 54% year-over-year
• 25% of 102 producers recorded positive free cash flow
• Only 14% of companies reported positive upstream earnings
• Cash balances increased $34 billion year over year for the 10 largest capitalized companies but decreased $6 billion for others

Companies took on a combined $72 billion in new long- and short-term debt in the second quarter, said the EIA, with average debt to equity ratios climbing to almost 60%.

“These figures are by far the highest recorded since at least the start of 2015, showing just how much and how quickly recent pressures have forced upstream producers to alter strategy around capital structure,” said Chris Wilson, Managing Director of Evaluate Energy.

The report also looks at production, capital expenditures, return on equity and more. Download the full document at this link.

For more information on the data behind the EIA’s analysis, click here to download a one-page overview of Evaluate Energy’s financial and operating database.

 

The value of asset impairments recorded by under-pressure North American upstream producers exceeded $100 billion during the first half of this year, due primarily to pandemic-related drops in oil demand and per-barrel prices.

This dramatic increase in impairments of property, plant and equipment (PPE) is based on an analysis of second quarter financials by Evaluate Energy.

A study of 129 companies (see note 1) illustrates that a further $19.7 billion in impairments was recorded in the second quarter, adding to the sudden $82.4 billion recorded in first quarter results by producers after oil prices crashed in mid-March.

For reference, the same 129 companies only recorded $42 billion in impairments between them in the whole of 2019. $10.8 billion of this total (~26%) came from Chevron alone, related to its Appalachia shale and Big Foot assets in the U.S. and Kitimat LNG in Canada.

Source: Evaluate Energy

A total of 106 companies out of the 129 North American producers recorded at least some PPE impairments in 2020 so far, with 43 of those recording impairments in the second quarter. 27 producers have recorded impairments in excess of $1 billion over the six-month period, compared to only 13 over the whole of 2019.

Source: Evaluate Energy

“This $100 billion in asset impairments is obviously a significant figure and such a drop in asset value is hardly going to endear producers to the market at large when it comes to attracting investment,” said Eoin Coyne, Senior Analyst at Evaluate Energy.

“The timing of the initial sudden price crash meant that Q1 results predictably saw by far the greater levels of PPE impairments. A further 24% increase in these figures after further re-evaluation in Q2, however, shows that things have become even tougher for the 43 companies involved.”

“It remains unclear as to whether any of these impairments will be reversed as 2020 continues. Oil prices did recover to a consistent average of over $40/bbl but have dropped back below this value since the end of August.”

Coyne added: “It is also important to point out that it is just PPE assets we’re talking about here. This first six months of 2020 has also seen major widespread asset write-downs on the exploration and evaluation sides of the industry, massive inventory write-downs and significant levels of goodwill impairments that all have had an impact on balance sheets across the upstream space.”

Evaluate Energy’s financial and operating database allows deeper analysis of all impairments and asset write-downs, as well as other impacts of the demand crash and price downturn, including hedging-related gains and changes in debt. All this information is accessible on an individual company-by-company level and downloadable to Excel.

Click here for more information on our products.

Notes

1) The 129 companies were made up of U.S. or Canadian-based companies with at least some production in either country. All companies produce over 1,000 boe/d in total and they all recently reported a second quarter report for the three- and six-month period ended June 30, 2020.

Canadian Natural Resources Ltd. (CNRL) agreed to acquire Montney-focused Painted Pony Energy Ltd. this week in an all-cash deal worth C$0.69 per share, representing a total value (including debt assumed) of around US$344 million.

This acquisition of Painted Pony will help to re-balance the oil/gas split in CNRL’s portfolio as well as adding almost 200 producing wells, says Evaluate Energy Senior M&A Analyst, Eoin Coyne.

“In 2002, the oil/gas split on a production basis for CNRL was 52% in oil’s favour,” Coyne said. “This increased to reach 79% by Q2 of this year, following a series of large oil-weighted acquisitions. At a time when global events have highlighted the exposure of oil markets to demand shocks, the acquisition of Painted Pony will reduce CNRL’s oil weighting to 76% based on recent quarterly data from each company.”

Coyne also noted that the Painted Pony deal sees CNRL re-enter M&A after a relative hiatus during the first half of 2020. The table below shows the number of net producing wells acquired during the first half of each of the past five years, using analysis of monthly provincial well ownership data available via CanOils Assets. The acquisition of Painted Pony will add 197 producing wells (as per year end 2019 data disclosed by Painted Pony).

Source: Evaluate Energy M&A, via CanOils Assets

This is the second deal in the Montney for over US$100 million this quarter after an extremely quiet start to 2020 in the first six months of the year that only saw $340 million in new deals agreed for Canadian upstream assets. The first deal was an oil-weighted deal that saw ConocoPhillips acquire ~14,000 boe/d from Kelt Exploration for US$375 million in cash and the assumption of $30 million in financing obligations.

Evaluate Energy’s M&A database holds the details on these two deals as well as every upstream M&A deal around the world. Our data also includes deals from other energy sector industries, including renewable power deals. Click here for more information on Evaluate Energy’s global energy M&A database.

Evaluate Energy – the global oil, natural gas and renewables data and analysis business – has unveiled a suite of ESG solutions.

A focus on Environment, Social & Governance considerations is essential for energy companies worldwide. Meeting and exceeding ESG requirements is a prerequisite for new investors, for communities when granting a social license to operate, and for governments pursuing broader emissions reduction targets.

Evaluate Energy has selected a range of ESG consulting partners in Canada to deliver core ESG services. These services are detailed at this link.

Evaluate Energy’s Canadian ESG partners include:

• Taylor Energy Advisors
• GLJ
• Cumulative Effects Environmental Inc.
• CERI
• WaterSMART

Evaluate Energy latest M&A report – available for download here – shows that just $4 billion in new deals were agreed in Q2 2020. This represents a 96% drop from an already relatively low total of $21 billion three months earlier in Q1 2020.

This was the first entire quarter to play out under the cloud of the COVID-19 pandemic and the uncertainty surrounding the industry can be seen in low deal values and low deal counts.

Source: Evaluate Energy M&A Review, Q2 2020

The report also shows that $10 billion-worth of deals agreed before Q2 were impacted by the pandemic. These include BP’s exit from Alaska and ConocoPhillips’ exit from Australia. Full details on the major deals affected directly by the pandemic are available in the report, including deals that were cancelled or had terms renegotiated.

The full report, which was released in partnership with Deloitte, is available to download at this link.

 

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The U.S. Energy Information Administration has used Evaluate Energy data to show how 40 U.S. oil and natural gas producers collectively wrote down $48 billion worth of assets in the first quarter. These 40 publicly traded companies collectively produced 6.1 million barrels per day of crude oil and other liquids in the United States, or about 30% of all the U.S. liquids production for the quarter.

The full analysis from the EIA is available here as part of its This Week in Petroleum series.

The impairments represented 22% of the net present value of the 40 companies’ proved reserves as of the end of the previous year, according to the EIA’s analysis.

The data for this analysis, as well as further analysis in the This Week in Petroleum article conducted on capital budgets and credit facility drawdowns, was extracted from Evaluate Energy.

For more on the Evaluate Energy global financial and operating database, click here.