EIA: Oil Firms May be Planning to Invest Again

The U.S. Energy Information Administration (EIA) reported Wednesday that oil and gas companies have increased their price hedging activity, a possible sign that they are planning to increase investments in exploration and production. 

Oil companies typically take out hedges in order to insure new projects against the risk of future price drops. With long lead times from the start of a project to first oil, prices can change significantly from the values used during planning.

In addition, EIA noted that some oil companies announced "flat or slightly increased future capital budgets in their latest quarterly statements," a change from a long run of declining investments in future capacity. 

Oil companies turn the corner 

The EIA regularly aggregates earnings statements on upstream E&P from more than 100 oil companies around the world. Their combined income from upstream activities came to nearly $5 billion in the third quarter – the first positive number for this index since late 2014. About half of the firms in the index reported a profit for the period.

Many of these firms held production stable over the last two years despite cutting back on capital investment. Projects which were under development when oil prices fell were still coming online throughout 2015 and 2016, helping to offset the normal decline in output of existing wells, EIA said. 

Asset impairments come to an end

Recently, rising oil prices have lifted both revenue from petroleum production and the market value of oil firms' assets, reducing the impact of asset write downs.

During the worst of the downturn, the oil sector's profitability suffered from a wave of asset write downs, which are required by accounting rules when an asset's market price is less than the value listed on the firm's balance sheet. For commodity firms with high-value reserves, a steep reduction in commodity price means a steep reduction in an asset’s market value. Among other examples, DONG Energy and BHP Billiton wrote down their petroleum reserves by a combined $12 billion in January. [ExxonMobil stood alone as the sole oil major not taking write-downs, prompting regulators to investigate its accounting methods.]

Now that oil prices have recovered to the $40-50 per barrel range, productive assets are worth more and impairments have declined significantly, EIA says – boosting oil firms’ income from upstream activity.