I Can't Go for That (No Can Do), Part 3 - Drilling Down Into Major E&Ps' Capex and Production Guidance

The Biden administration’s March 31 announcement that it will release an average of 1 MMb/d of crude oil from the Strategic Petroleum Reserve over the next six months was an acknowledgement of sorts that U.S. E&Ps won’t be ramping up their production enough in the near term to bring down oil or gasoline prices. It seems like a good assumption because, while the 40-plus crude oil and natural gas producers we monitor have indicated they are planning a 23% increase in capital spending this year and an 8% increase in production, further examination reveals that those numbers are somewhat misleading — the real gains will be significantly smaller. In today’s RBN blog, we scrutinize producers’ spending plans and production outlooks by peer group and company-by-company.

This is the third blog in our series on the degree to which crude oil and natural gas producers are likely to respond to strong price signals — namely $100/bbl-plus WTI and $5/MMBtu-plus gas — by increasing their capex, drilling-and-completion activity and production. In Part 1, we reviewed the myriad of challenges faced by E&Ps, which includes inflation, severe labor and material shortages, soaring energy costs, ESG concerns, and an investor-focused strategic shift from growth to free cash flow generation. In Part 2, we explained why there is less than meets the eye in producers’ planned 23% capex increase and 8% boost in production — and why their plans do not represent a strategic shift from the maintenance-level investments they’ve been making the past few years.

Today, we’re going to provide further insights by highlighting the 2022 investment decisions made by the boards of these large oil and gas producers.

First, let’s quickly review the aggregate 2022 guidance of the 43 major publicly traded E&P companies we track. As shown in Figure 1, these producers are targeting 2022 capital investment of $48.6 billion, a 23% increase over 2021, and forecast production growth of 8% –– far lower than the magnitude of the spending increase but four times the 2% increase in production from 2020 to 2021. Importantly, the E&Ps’ published budgets include allowances for inflation of up to 10%-15% and note that, with their steep drawdown of drilled but uncompleted wells (DUCs) over the past two years, a considerable portion of their drilling activity this year will be tied to simply maintaining current production levels. Also, the capex of a few E&Ps includes investment in the development of assets entering the companies’ portfolios in 2022 that were not accounted for in their 2021 results. It really comes down to this: After severely restricting long-term investments during the pandemic-induced oil price plunge 24 months ago, companies are cautiously resuming development of projects to counter steep short-term shale decline rates and provide modest long-term growth. Producers are also intently focusing on enticing investors with rising shareholder returns.