The past production profiles of the ten companies in RBN’s Gas-Weighted E&P peer group are dramatically different from the Oil-Weighted and Diversified U.S. E&Ps, boosting production by over 18% from 2014 to 2015, while the output of the other two peer groups was virtually flat. The group as a whole finally put on the brakes in early 2016 because of mounting debt and persistent low gas prices, cutting capital investment by 49% to dampen production growth to 4%. However, a small group of producers with solid balance sheets and strong hedging protection continue to target double-digit output growth. And with gas prices over $3.00/MMbtu, more growth is on the way. In today’s blog we discuss 2016 capital spending and production for our representative group of E&Ps whose operations are primarily focused on natural gas.
Here in the RBN blogosphere we have been reviewing U.S. upstream capital spending and production trends for the past couple of years. Back in August, we analyzed the second quarter 2016 capital spending and production guidance for 46 of the top U.S. E&Ps that we segregated into three peer groups––Oil-Weighted E&Ps, Diversified E&Ps, and Gas-Weighted E&Ps. That analysis was contained in the blog titled Been Down So Long - U.S. E&P Upstream Capex Bottoms, Signs of Growth Emerge and we showed that total capital spending in 2016 was expected to be about 50% lower than in 2015 after a 40% reduction in 2014. Based on the company’s financials and investor presentations we calculated an expected 4% decline in production for 2016, we also pointed out that second quarter 2016 production guidance was stronger than original 2016 estimates because of an increase in oil prices from the lows in early 2016. Next, we took a deep dive into the Oil-Weighted E&Ps in a blog titled You Go Your Way, I'll Go Mine - Oil-Weighted E&Ps Put the Brakes on Capex Cuts, But Location Matters. In that analysis, we noted that while capital spending was expected to be down 51% in 2016, there was a new feeling of optimism driven by the reduction in drilling and completion costs and lease operating expenses, which contributed to the 20% increase in the U.S. rig count in late May 2016. Then we took an in depth look at the Diversified E&Ps in a blog titled Different Strokes by Different Folks: Unconventional Investment Rises, Conventional Falls among Diversified U.S. E&Ps. In that analysis, we saw that this peer group has reduced capital investment by 70% since 2014, or almost $40 billion. And the cumulative effect of these spending cuts is an estimated 5% decline in production or nearly 100 MMboe in 2016.
Today we are taking a deep dive into the ten companies that comprise our third peer group, Gas-Weighted E&Ps, eight of which are primarily Appalachian producers. Figure 1 shows that the Gas-Weighted E&Ps are planning to slash spending by 49% in 2016 (red oval); after a 28% decline in 2015; they have reduced capex by 64% since 2014. These spending cuts, however, have not diminished the group’s production outlook. The production response lagged, as output increased by nearly 18% to 5.5 Tcfe in 2015. Overall, that forecast fell to just a 3.1% production increase in the second quarter 2016, and is about 2% lower than original 2016 production guidance. However, four producers, Rice Energy, EQT, Antero Resources, and CONSOL Energy, are forecasting double-digit production growth (green ovals), while the remaining six expect an average 5% reduction in output.