Net income for 43 U.S. oil producers rose to a five-year high of $28 billion in 2018, according to the U.S. Energy Information Administration (EIA). Based on net income, 2018 was the most profitable year for these producers since 2013, even though crude oil prices were lower in 2018 than they were in 2013.
Lower costs to produce a barrel of oil and increased production levels contributed to a higher return on equity for the producers in the fourth quarter of 2018 than in any other quarter from 2013 through 2018. The producers included in EIA’s analysis are listed on U.S. stock exchanges, and these public companies accounted for about one-third of U.S. crude oil and natural gas liquids production in the fourth quarter of 2018.
The producers’ upstream production expenses increased at a low rate, and these expenses typically correlate with crude oil prices. But the magnitude of these increases in 2018 was small compared to the increase in prices. The West Texas Intermediate crude oil price rose 28% to an average of $65 per barrel in 2018, from 2017, but over the same period, upstream production expenses increased 16%, or the equivalent of $24 per barrel. The producers’ expenses not directly related to upstream production were the equivalent of $48 per barrel in 2018, the lowest amount from 2013 to 2018.
The producers’ upstream revenue rose 31% to the equivalent of $48 per barrel in 2018, from 2017, because of the rise in average energy prices and production. Between the third and fourth quarters of 2018, the producers’ upstream revenue fell 11% as crude oil prices declined in late 2018. Some of the producers reported financially hedging nearly one-third of their fourth-quarter 2018 production at prices in the mid-$50 per barrel range, and this offset the revenue declines when crude oil prices fell below $50 per barrel by the end of the year. While upstream revenue declined in the fourth quarter of 2018, the producers’ total revenue rose as a result of gains from financial derivatives.
Contributions to revenue from derivative hedges — which rise in value when prices fall — for the producers increased to the largest total for any quarter since the fourth quarter of 2014, according to the EIA. Financial hedging can act as an insurance policy and can reduce risk by creating stable revenue for producers. When oil prices fall below the prices at which producers established a hedge, the producer will receive higher revenues than selling at market prices. When oil prices increase to a higher level than the hedged price, the hedging becomes a loss that’s treated as an operating expense.