When legendary University of Texas football coach Darrell Royal was asked how he approached important games, he frequently said, “You dance with the one who brung ya,” which meant sticking with the strategy that produced previous success. After struggling through a period of extreme price volatility in 2014-20, U.S. E&Ps finally locked onto a game plan that works: They wooed back investors and regained financial stability by focusing on generating free cash flow and returning a lot of that bounty to shareholders. In today’s RBN blog, we analyze E&Ps’ 2024 capex and production guidance, which shows that producers have embraced Royal’s concept of sticking with what works.
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After the price plunge at the onset of the pandemic in early 2020, the 40 E&P companies we cover (every U.S. E&P with a market cap of over $500 million) slashed capital investment by 50% to just $33 billion to conserve cash. Despite a price recovery, spending inched up only 5% in 2021 to $34.8 billion. However, 10% to 20% inflation in oilfield goods and services, combined with the need to boost the inventory of drilled but uncompleted wells (DUCs) after a steep pandemic drawdown, drove a 24% increase in initial 2022 investment guidance to $43.2 billion. As we reviewed in Take It Easy, sustained high commodity prices allowed producers to increase drilling to offset steep shale decline rates, leading to substantial quarterly increases in investment that resulted in total 2022 capex of $52.7 billion, up 51% from 2021 and the largest growth rate in over a decade. The result was a 7% increase in total production to 4.7 billion boe, surpassing the pre-pandemic 4.5 billion boe produced in 2019. High realizations also allowed E&Ps to dramatically accelerate dividends and share buybacks that had successfully won back investors.
Inflation as well as increased organic capital outlays related to acquisition activity led to another 25% increase in 2023 investment to $65.6 billion, just short of the $66.2 billion spent pre-pandemic in 2019. Production growth last year was a still-healthy 7%, to 4.8 billion boe. However, declining cash flows from lower commodity prices drove the reinvestment rate — i.e., the percentage allocated to capital spending — from an all-time low of 39% in 2022 to 76% in Q2 2023. The subsequent squeeze on free cash flows led some producers to debt-fund dividends to avoid dramatic decreases in shareholder returns. Cash flows improved modestly with prices in Q3 2023 but dipped again in Q4. As we reviewed in I Can See Clearly Now, second-half guidance reflected a halt in capex growth as producers weighed their 2024 investment priorities: boosting free cash flow or continuing production growth?
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About the song
“Dance With the One That Brought You” was written by Sam Hogin and Gretchen Peters. It appears as the third song on Shania Twain’s debut album, Shania Twain. Released as the second single from the LP in July 1993, it went to #55 on the Billboard Hot Country Songs Singles chart. A music video for the song was made in Los Angeles and directed by actor Sean Penn. Personnel on the record were: Shania Twain (lead, backing vocals), Mark Casstevens (acoustic guitar), Steve Gibson (electric guitar), Glenn Worf (bass), Sonny Garish (steel guitar), Terry McMillan (harmonica, percussion), Paul Leim (drums), David Briggs (keyboards), Costo Davis (synthesizer), and Anthony Martin, John Wesley Ryles and Cindy Richardson Walker (backing vocals).
The album Shania Twain was recorded in 1992-93 at Music Mill Recording Studio in Nashville with Harold Shedd and Norro Wilson producing. Released in April 1993, it went to #67 on the Billboard Top Country Albums chart. Due to Twain’s later success, the album continued selling and has since been certified Platinum by the Recording Industry Association of America. Three singles were released from the LP.
Shania Twain is a Canadian singer and songwriter. Having sold over 100 million records worldwide, she is considered the “Queen of Country Pop.” She signed her first record deal with Mercury Records Nashville in 1992. After meeting mega-platinum record producer — and later husband — Mutt Lang, she rose to chart dominance with her second album, The Woman in Me, selling 20 million copies. She has released six studio albums, two live albums, three compilation albums, and 45 singles. She has won a Billboard Icon Award and numerous ACM and CMA Awards and is a member of the Nashville Songwriters Hall of Fame. She continues to record and tour and in May will start her third Las Vegas residency at Bakkt Theater at Planet Hollywood Casino and Resort.
Comments
In particular Royal was asked if he would pass the ball as he had a running based offense when asked. He had a saying "There's 3 things that can happen when you pass and 2 them are bad".