As the U.S. starts to emerge from under the dark cloud of the COVID-19 pandemic, one hopes that some valuable lessons have been learned as a result of the hardships and sacrifices so many have endured. While the most profound impacts were on government, healthcare and other essential services, the sudden drop in hydrocarbon demand a year ago triggered severe financial hardships for the E&P sector and provoked unpleasant memories of previous energy industry crises in 2008 and 2014-16. Producers have historically put the brakes on capital spending when commodity prices fell, then stomped on the accelerator like a race car heading into a straightaway when prices rose. But recently unveiled 2021 budgets for many E&Ps suggest that, even with the rebound in prices, they are maintaining a conservative investment paradigm that highlights strengthening balance sheets and rewarding shareholders at the expense of rapid production growth. Today, we’ll analyze the 2021 capital spending plans of the 39 E&Ps we monitor and the likely impact on their crude oil and natural gas output.
For the past five years, RBN and our friends at Oil & Gas Financial Analytics have regularly blogged about the capital expenditure plans of a representative collection of major public E&Ps, a group we refer to as our “universe” of tracked companies. At the onset of the pandemic in March 2020, we chronicled these companies’ severe pullback in capex as commodity prices plunged in our blog, Paint It Black, and followed up with a warning about the dangers of the industry’s high cost structure (see Eve of Destruction). Most recently, in The Bare Necessities, we pointed out that lean second-half-2020 investment budgets were a positive sign that E&Ps were heeding the lessons from the downturn.
Remarkably, that trend of capital discipline has continued. Figure 1 below, which charts total 2014 to 2021 (estimated) upstream capital spending for our 39-company universe, vividly shows how the E&P sector has been curbing its once-profligate ways. After oil prices fell from over $100/bbl in mid-2014 to $30/bbl in late 2015, producers cut their 2016 capital spending by more than half to $38.8 billion from $78.9 billion the previous year. As prices recovered to $50/bbl late that year, E&P managements abruptly accelerated 2017 investment by 59% to over $60 billion. The pandemic-induced price drop in March 2020 triggered a similar 50% reduction in industry capital spending, to $36.2 billion from $71.8 billion in 2019. With oil prices jumping to more than $60/bbl in early 2021, history would suggest an aggressive response by oil and gas companies. But surprisingly, the announced capital budgets of our 39 E&Ps total just $36.5 billion, about $235 million (or 1%) lower than in 2020 and only 30% and 59% of the levels that were invested by the industry in 2014 and 2017, respectively. The new budgets overwhelmingly target “maintenance” capex — spending with the aim of keeping production levels flat — with the companies as a group guiding to a 1% decline in output to 4.5 billion barrels of oil equivalent (boe) after a 4% decline in 2020. The strategic focus of their 2021 investment is generating free cash flow, increasing dividends, strengthening balance sheets, and, for a handful of companies, share repurchases.
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