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Different Strokes by Different Folks - Investment in Unconventional Plays Rises Among Diversified U.S. E&Ps

A group of 15 diversified exploration and production companies we have been tracking collectively has slashed capital expenditures by 70% since 2014, but so far the cumulative effect of these spending cuts has been only a 5% decline in production. Now, several of these E&Ps––especially those targeting the Permian Basin and the SCOOP/STACK plays––are planning capex increases and/or expecting production gains. Today we discuss 2016 capital spending and production for a representative group of E&Ps whose operations are roughly balanced between oil and natural gas.

RBN has been analyzing U.S. upstream capital spending and production trends for the past two years. In August, we reviewed the second quarter 2016 capex and production guidance for 46 of the top U.S. E&Ps (our “universe”, see Been Down So Long). We segregated these companies into three peer groups––Oil-Weighted E&Ps, Diversified E&Ps, and Gas-Weighted E&Ps––and showed that for the three groups as a whole, capital spending in 2016 was expected to be 50% lower than in 2015 after a 40% reduction from 2014 to 2015. We also noted that second quarter 2016 capex guidance for the 46 companies was only 2.5% lower than original 2016 estimates, indicating that the rate of capital spending cuts was slowing, and 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 (see You Go Your Way, I'll Go Mine). In that analysis, we noted that while capital spending for the group 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 and a slightly more bullish price outlook. This positive attitude resulted in a 20% increase in the U.S. rig count in late May 2016 and, in particular a 43% gain in the Permian. The Permian Basin-focused E&Ps were the most aggressive, cutting capex only 19% in 2016 compared to a roughly 50% decline for our entire universe of companies.

Today we will review 2016 capital spending and production guidance for the 15 companies that we have classified as Diversified, which means that neither their oil/liquids nor their natural gas production represents more than 60% of total output. Overall their U.S. portfolios encompass assets in more regions than their Oil-Weighted Peers, which tend to be heavily focused on the Permian Basin, the, Sooner Trend Anadarko Basin Canadian Kingfisher (STACK) and South Central Oklahoma Oil Province (SCOOP) plays, the Williston Basin, and the Denver-Julesburg (DJ) Basin.

Figure 1 shows the Diversified E&P Peer Group cut capital spending by 53% in 2016 after a 35% reduction in 2015. Collectively, the peer group has reduced capital investment by 70% since 2014, or almost $40 billion. The cumulative effect of these spending cuts has been an estimated 5% decline in production, or nearly 100 MMboe, virtually all of it occurring in second quarter 2016. However, several of these companies announced capital spending and/or production guidance increases in the second quarter, and overwhelmingly these more optimistic producers are targeting a growth in output from the Permian Basin or the SCOOP and STACK plays.

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