The Future of Oil and Gas E&P: Trends in Exploration, Production, and Market Dynamics

The oil and gas industry is undergoing a significant transformation. As global energy demand fluctuates, oil and gas producers face a stark choice: adapt or risk falling behind. Financial advisors and industry stakeholders must stay informed about the key trends shaping the exploration and production, or E&P sector as companies adapt to these changes. 

The full Industry Landscape Oil and Gas Exploration and Production report analyzes capital return-focused firms that develop and produce oil and natural gas.  

The following content and charts are based on its findings. Download the full report for detailed insights. 

In the oil and gas industry, E&P refers to the initial phase of operations, which involves locating and extracting oil and natural gas. This process includes identifying potential underground or underwater reserves and drilling wells to retrieve these resources. 

The industry is divided into three main segments: 

• Upstream: Focuses on discovering and extracting oil and gas. 

• Midstream: Handles transportation, storage, and wholesale marketing of crude oil and natural gas. 

• Downstream: Involves refining crude oil, processing natural gas, and distributing petroleum products to consumers.  

E&P falls under the upstream segment, while midstream operations manage hydrocarbon logistics, and downstream processes refine and distribute fuel products such as gasoline and diesel. Several major companies operate in the E&P sector, including ExxonMobil, Chevron, and ConocoPhillips. 

The global energy transition is reshaping oil demand, with peak consumption expected by 2030. While the adoption of electric vehicles is gaining momentum, the complete displacement of oil-based fuels will take time due to the long lifespan of internal combustion engines. Industries such as aviation, shipping, and petrochemicals continue to rely heavily on oil, and viable alternatives remain limited.  

Despite the long-term downward trend in demand, oil produced from existing and new exploration drilling efforts will maintain a critical role in the global energy mix for decades. E&P companies are adapting to this new reality by optimizing the production process and focusing on cost-effective oil and gas reserves. Though some traditional markets may shrink, emerging economies, particularly in Asia, are expected to sustain significant levels of oil consumption. 

The E&P business has been characterized by aggressive spending and rapid expansion, often leading to financial instability during downturns. Producers have shifted their strategies following the price collapse of 2015 and the disruptions caused by the COVID-19 pandemic. 

Today, capital discipline is a priority. Companies are exercising restraint in their drilling activities, ensuring that cash flows are directed toward shareholder returns rather than unchecked expansion. The result has been a decoupling of drilling activity from oil price fluctuations—a stark contrast to past boom-and-bust cycles. Many firms have adopted variable dividend structures and stock buybacks, making the industry more attractive to income-focused investors. 

This financial prudence is expected to provide long-term stability for E&P firms, allowing them to weather future market volatility without the excessive debt burdens that plagued the sector in previous downturns. 

Natural gas is typically used for electricity generation, where it competes with coal, nuclear power, and renewables. While natural gas is a fossil fuel and a source of methane and CO2 emissions, it is still a desirable energy source. Coal has historically been the largest source of global of electricity, but natural gas gives off roughly 50%-60% less carbon dioxide emissions than coal, making it a far more sustainable resource for power generation.  

Other uses include industrial (such as construction, chemicals, and manufacturing), residential, transportation, and commercial. Natural gas can be used as a fuel source for heating and cooking in residential and commercial applications. In industrial utilization, natural gas is a key ingredient for products like paint, glass, and clothing. For transportation purposes, natural gas is used in natural gas vehicles, which include buses and shuttles, construction vehicles, and public transportation vehicles.  

As the world seeks cleaner energy sources, natural gas emerges as a bridge fuel between traditional hydrocarbons and renewables. The Permian Basin is the largest and lowest-cost unconventional oil producer in the United States, with the Energy Information Administration projecting it to be the main source of future US growth.  

The Marcellus and Permian basins have positioned the country as a dominant force in liquefied natural gas exports. European and Asian markets have significantly increased their reliance on United States LNG, particularly in the wake of geopolitical disruptions affecting traditional energy supplies. However, infrastructure bottlenecks pose a challenge to continued growth. Pipeline constraints, particularly in the Northeast, and regulatory hurdles for export terminal expansions could limit the pace of supply increases. 

Demand for LNG from the United States is expected to rise despite these obstacles, driven by its cost advantages and geopolitical stability compared with other major suppliers. Companies that can navigate these logistical challenges stand to benefit from the ongoing shift in the natural gas market. 

Understanding these trends is essential for making informed decisions in a rapidly evolving market. As E&P companies refine their strategies, those prioritizing efficiency, capital discipline, and adaptability will be best positioned for long-term success. 

• E&P Companies as Capital Return Stocks: Financial advisors can inform their clients about the potential for steady returns through dividends and share buybacks, but they should also emphasize that these returns can fluctuate with market conditions. 
• Yield-Hungry Investors Should Watch E&Ps: E&P companies are projected to maintain a substantial free cash flow yield, which could be appealing to income-seeking investors. 
• EVs and the Oil Industry: The rise of electric vehicles is expected to impact the oil industry significantly. By 2050, EVs are predicted to make up 75% of the vehicle fleet. This shift could lead to a decrease in gasoline demand, affecting companies focused on traditional fuel production. 
• Global LNG Demand: Advisors can provide guidance to clients looking to invest in companies that are well-positioned to capitalize on this trend. 

Morningstar Direct Advisory Suite can help financial advisors analyze the impact of adding E&P stocks to a portfolio, providing historical and current data, key ratios, and cash flow analysis. Useful data points include: 

• Dividend Yield (Div Yld) 

• Price-to-Earnings (P/E) Ratio 

• Gross Margin 

• Operating Margin 

• Return on Assets (ROA) and Return on Equity (ROE)