Don't Stop Believin', Part 2 - E&Ps Boosting Production Despite Sharp Cuts to Capital Spending

You wouldn’t know it yet from outright crude oil production volumes, which stood at 13.1 MMb/d last week, but with crude oil prices in the cellar, the situation for U.S. E&P companies has rapidly gone from bad to worse. The double whammy of the coronavirus and the Saudi’s decision to flood oil markets with new production has cast a pall over the U.S. E&P sector, sending share prices plummeting. Producers had already taken a stripped-down approach to 2020 investment, with previous guidance reducing capital expenditures by 14% in order to boost free cash flow and hike shareholder returns. That was on top of the 7% decline in capex seen in 2019. But in the last 10 days, about half of the 42 E&P companies we track have announced further, substantial cuts in planned capex. And with West Texas Intermediate prompt crude oil futures settling at $25.22/bbl yesterday — well below breakeven for many producers — and still-lower prices a real possibility, more industry-wide reductions are looming as first-quarter earnings are announced in April. Today, we break down what the recent announcements mean for capex and production volumes.

The Shale Revolution that unlocked vast, low-cost oil and gas reserves, resulting in soaring production that transformed the U.S. from a major oil and natural gas importer to a rising exporter, was supposed to usher in a “Golden Age” for exploration and production firms (E&Ps). Instead, investors have increasingly abandoned energy equities, sending the S&P E&P stock index to an all-time low. The index closed at 3,272 on August 16, 2019, or about 75% lower than the all-time high of about 12,500 in mid-2014 and 46% lower than a year ago. And the stock prices of three-fourths of the big, publicly traded E&Ps have hit record lows over the last month. This energy-equities bloodbath would seem to indicate that the E&P industry is on the verge of financial meltdown. However, the just-released second-quarter 2019 results from the 44 U.S. E&Ps we track suggest that’s not entirely the case. Lower commodity prices certainly tightened the screws on the bunch, particularly companies that focus on gas production, but oil-weighted companies managed to eke out profit and cash-flow gains. Today, we provide an in-depth analysis of second-quarter earnings for oil-weighted, gas-weighted and diversified producers.

There has always been an aura of excitement, adventure and risk surrounding the quest to unlock natural resources, from the California Gold Rush to the early days of Texas oil wildcatting. Today’s exploration and production leaders may be just as passionate as their predecessors, but the “riverboat gambler”-type days of reckless spending in pursuit of growth now seem like a distant memory. In the brutal aftermath of the oil price crash in late 2014, producers have been forced to follow their heads instead of their hearts, adopting a far more careful approach to investment that prioritizes portfolio rationalization over expansion, and cash flow above growth. E&P companies in 2019 slashed capital investment, and, according to early guidance, they will again in 2020. Underscoring this more conservative attitude is the release of the 2019 Securities and Exchange Commission price deck, which impacts the economics of booking oil and gas reserves. It showed the WTI oil price for SEC reporting purposes declined about $10/bbl, or 15%, to $55.69/bbl in 2019, while the Henry Hub SEC price declined by 17%, to $2.58/MMBtu. Today, we examine a representative group of U.S. E&Ps’ spending plans for 2020, which reflect the impacts of a lower-price environment.