While soaring commodity prices have been the most important driver of record E&P cash flow generation over the past 12 months, shareholders have also benefited from a new, post-pandemic financial discipline that has lowered the industry’s reinvestment rate to an all-time low of 35%. However, the 2022 capital expenditures initially planned by the 42 U.S. producers we track were expected to rise a healthy 24% over 2021 levels and their spending plans for the just-finished year continued to increase as 2022 wore on. While only a handful of E&Ps have released their actual 2023 budgets, their most recent conference call comments suggest that the investment momentum will keep building in the new year. In today’s RBN blog, we analyze producers’ 2022 capital investment and the key indicators for 2023 growth.
In their 1965 song, “It’s Growing,” the Temptations croon about “a snowball rolling down the side of a snow-covered hill.” This concept of momentum is highly relevant to the pattern of E&P capital investment since the beginning of 2022. The major nudge that started the snowball rolling was the widespread post-pandemic inflation that roiled the oil and gas industry as well as the global economy. As we discussed in our early-2022 blog, I Can’t Go for That (No Can Do), an estimated 10%-20% of oilfield-service inflation was the primary driver in the 24% increase in capex that the E&Ps we monitor were initially planning for 2022. (The 42 producers invested $39.7 billion in 2021 and planned to ramp that up to $49.3 billion last year). That $49.3 billion was then increased by 3%-4% in each of the first three quarters of 2022 as E&Ps expanded their drilling plans to counter a steep drawdown of drilled but uncompleted wells (DUCs) over the previous two years as well as adjusting capex for continuing oil-field service inflation. The evidence includes a 32% increase in U.S. land-based rigs, from 586 at year-end 2021 to 779 at year-end 2022.
As shown in Figure 1, our current capital investment summary, based on Q3 2022 reporting, now estimates that 2022 capex by the 42 E&Ps will total $54.9 billion (multicolored bar to far right, left axis), a 38% gain over 2021. This includes a 27% increase for Oil-Weighted producers (blue bar segment), a 44% gain for the Diversified E&P peer group (orange bar segment), and 54% growth for the Gas-Weighted E&Ps (gray bar segment). Only two companies out of the 42 were budgeting lower investment. Full-year 2022 oil and gas production estimates for the group (yellow line, right axis) now show an increase of 9% in 2022, up from the initial estimate of a 7% gain, the increase driven in part by significant acquisitions by several producers. That’s the highest production growth rate since 2017.
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About the song
“It’s Growing” was written by Smokey Robinson and fellow Miracles member Pete Moore. It appears as the sixth song on side one of The Temptations’ second studio album, The Temptations Sing Smokey. Released as the second single from the album in March 1965, it went to #3 on the Billboard R&B chart and #18 on the Billboard Hot 100 Singles chart. Along with the previous single, “My Girl,” the song was one of the first to feature The Temptations’ new lead singer, David Ruffin. The tune has been covered by Otis Redding, The Contours, Kate Taylor, and Paul Rodgers. Personnel on the record were: David Ruffin (lead vocals), Eddie Kendricks, Melvin Franklin, Paul Williams, Otis Williams, The Andantes (backing vocals), The Funk Brothers (instrumentation), and the Detroit Symphony Orchestra (strings).
The Temptations Sing Smokey is composed entirely of songs written and produced by Smokey Robinson. Recorded in 1964-65 at Hitsville U.S.A. in Detroit, the Smokey Robinson-produced album was released in March 1965. It went to #1 on the Billboard Top R&B Albums chart and #35 on the Billboard 200 Albums chart. Two singles were released from the LP.
The Temptations are an American vocal group formed in Detroit in 1960 as The Elgins by Otis Williams, Paul Williams, Al Bryant, Melvin Franklin, and Eddie Kendricks. They released a series of successful singles and albums with Motown Records during the 1960s and ’70s. Twenty-seven members have passed through the group since its formation. They have released 43 studio albums, four live albums, three soundtrack albums, 15 compilation albums, and 109 singles. They are members of the Rock and Roll Hall of Fame, Vocal Group Hall of Fame, R&B Group Hall of Fame, and are recipients of a Grammy Lifetime Achievement Award. The group still records and tours, with Otis Williams being the only original member in the group.
