Oil-Weighted exploration and production companies (E&Ps) are slashing capital spending in 2015, as they need to regain control of their costs in today’s lower oil price environment. With robust oil prices over the past three years, these companies only posted middling profitability as capital and operating costs ate up much of their incremental revenue. The Large Oil Weighted E&Ps are cutting back less than the Small/Mid-Sized Oil Weighted E&Ps as they are more financially secure and have more ability to spend through the price cycle. The Small/Mid-Sized Oil Weighted E&Ps are focused on getting their spending in line with cash flows and to get to a point where they are self-funding their capital investment. Today we explore how each of the companies in the two oil-weighted peer groups is trying to resolve these issues.
In Episode 1, we provided an overview of our analysis on exploration and development spending and production trends for a group on 31 E&P companies. We segregated the companies into four peer groups: Small/Mid-Size E&Ps, Large Oil Weighted E&Ps, Diversified US Gas Weighted E&Ps and Appalachian Gas Weighted Producers. The end result of the analysis was the Appalachian Gas Weighted Producers were cutting back the least on capex and expecting the largest production gain fueled by the best profitability in the study. The Diversified US Gas Weighted E&Ps were expected to cut back a little more sharply than the Appalachian Gas Weighted Producers on capital spending with no expectation of production growth in 2015. The two oil weighted peer groups, the Small/Mid-Size E&Ps and Large Oil Weighted E&Ps are cutting back on capital spending the most (42% and 38%, respectively). The two groups however are expecting to post production increases this year of 13% and 6% respectively. In this Episode, we are taking a deeper dive view into the two oil weighted peer groups. (We would like to again thank our friends at U.S Capital Advisors for getting us started with this analysis in Rig Cuts Deep, Output High!).
The Large Oil Weighted E&Ps
Two features differentiate the 5 Large Oil Weighted E&P companies in our survey group from Small/Mid-Sized Oil Weighted E&Ps. First the Large E&Ps are more focused on returns on capital rather than production growth and second, they are financially stronger. Many of these companies are former Integrated Oils, which helped incubate their emphasis on profitability and financial stability. In 2015, the Large Oil Weighted E&Ps are expecting to cut back on exploration and development spending by 36%, but are still forecasting a 6% gain in oil and gas production (see Table 1). Each company is highlighting savings from lower service costs indicating that drilling activity is not falling as fast as the budget declines indicate. In addition, these companies have a high degree of overlap in their domestic operations including the Bakken Shale, the Eagle Ford Shale and the Permian Basin. For more information on the economics of each of these and other plays in a low price environment, please see “It Don’t Come Easy”.
Marathon Oil, the company with the highest weighting to oil and liquids, 80%, is planning to cut back its capital spending by 43% in 2015, the sharpest in the group. About 40% of its capex is targeting the Eagle Ford Shale with an additional 20% being invested in the Bakken. US resource plays now account for 57% of the company’s production from continuing operations compared to 43% a year ago. Marathon expects a 20% gain in US resource play production in 2015 to 229 thousand barrels of oil equivalent per day (Mboe/d), but will continue to reduce its rig count from just fewer than 35 in 4Q/2014 to an average of 15 for 2015.