In connection with year-end 2015 earnings announcements, North American exploration and production companies (E&Ps) continued to announce large reductions in 2016 capital budgets. But the most dramatic news is that RBN’s analysis of a study group of 30 E&Ps indicates that these companies are finally expecting oil and gas production to fall in 2016 after a 7% gain in 2015. In today’s blog we update our continuing analysis of E&P capital spending and oil and gas production guidance.
As U.S. benchmark West Texas Intermediate (WTI) crude oil prices continue to hover around $40/Bbl, RBN’s analysis of 2016 capital expenditure guidance indicates that our study group of 30 E&Ps are cutting CAPEX in half, from $60.3 billion in 2015 to $30.6 billion in 2016. In just two years, upstream investment has plummeted by two-thirds from $94.9 billion in 2014. Importantly, the precipitous falloff in drilling is finally leading to lower expected US hydrocarbon output, driven by a decline in oil. As we examine below, the Large Oil-Weighted E&Ps and Small/Mid-Size Oil-Weighted E&Ps are guiding to 10% and 7% production declines, respectively, after a collective 6% increase between 2014 and 2015. This forecasted output decline has already contributed to modest gains for oil prices in recent weeks. Guidance for the Diversified US Gas-Weighted E&Ps indicates their output will fall 8%. But an expected 15% increase by the Appalachian Gas-Weighted E&Ps will leave the overall gas volumes delivered by our “universe” of 30 E&Ps about flat at 1.18 billion barrels of oil equivalent (boe). For more on boe, see The Golden Age.
Recap
In Episode 1 of this series back in May 2015, we provided an overview of the 2015 capital spending and oil and gas production trends for our “universe”, a select group of the largest U.S. based E&P companies, based on guidance given during the first quarter of 2015. Our goal was to understand how companies are responding to the challenge of lower oil prices in their capital spending (i.e. drilling) and expectations for production (productivity). We divided the universe into four peer groups: Small/Mid-Size Oil-Weighted E&Ps, Large Oil-Weighted E&Ps, Diversified Natural Gas-Weighted E&Ps, and the Appalachian Gas-Weighted E&Ps. In Episode 2, we did a deeper dive analysis into the two oil weighted peer groups in the study. We found that the Large Oil-Weighted E&Ps were cutting back by a lower percentage than the Small/Mid-Sized Oil-Weighted E&Ps because they are more financially secure and are better able to fund investment through the price cycle. The Small/Mid-Sized Oil Weighted E&Ps were focused on aligning spending with cash flows, with the goal of self-funding capital investment. In Episode 3, we analyzed the natural gas-weighted peers. Our analysis revealed that the US diversified natural gas companies were slashing capital spending in light of weak profitability, which in turn dampened production growth. In contrast, the Appalachian gas producers were the most profitable group in our analysis as a result of slashing costs while still generating increased output. In August (Episode 4), we updated our analysis on second-quarter 2015 guidance and noted that the Small/Mid-Sized Oil-Weighted E&Ps were the only peer group growing capital spending given the weak oil and gas price environment. In our most recent update (Episode 5), we highlighted that oil and gas production started to level off after nearly two years of crushing capital spending declines.
Join Backstage Pass to Read Full Article
About the song
“It’s an Uphill Climb To The Bottom” was recorded in 1966 by R&B singer Walter Jackson and went to number 11 on the R&B charts, and number 88 on the top 100. Jackson was afflicted with polio as a child, but overcame his physical disability to become a top R&B recording artist.
Comments
Let's think about the time lag between capex and production for a minute. We all know that it takes some amount of time for production to respond to declines in capex, which is offset to some degree by productivity gains. It seems to me that it makes more sense to compare the 14-15 capex cuts to the 15-16 production guidance - this would give a clearer indication of who is experiencing the best productivity improvements - i.e. comparing dollars put into the ground with commodity coming out of the ground.
If you look at the small oil producers in figure 1, take EGN for example - the 15-16 capex cut is 76% with 17% production declines, not too bad of a productivity gain one would think. But when you look at the 14-15 capex, you can see that their cut was much less than its peers. Whereas a loo at XEC shows more than 50% cut in 14-15 with a 7% production decline in 15-16.
Arguably the time lag is shorter than a year, let's say 6 months, but companies generally don't provide quarterly guidance. Introducing time lag into the comparison seems to give a better indication of the "winners and losers".
Greg:
Good point on the time lag. Perhaps we will introduce that thought in the next update we do on capex and production changes for 2016. That will probably be done sometime after the 2Q/16 earnings releases.