I Won't Back Down - Many E&Ps Defy Soft Prices and Expect 2017 Capex to Exceed Cash Flow

Despite some hints that U.S. exploration and production companies are slowing some of their drilling in high profile shale basins — including last week’s decline of 15 operating rigs in the Baker Hughes count, our analysis of 43 representative E&Ps suggests that more than half expect their upstream capital spending in 2017 to exceed cash flow — a definite sign of optimism — and one fifth of the E&Ps will outspend cash flow by more than 50%. Is this a case of rose-colored glasses? Blind faith? Or have E&Ps’ post-price-crash efforts to high-grade their portfolios and improve their operational efficiency given them well-deserved confidence that if they don’t “back down” on capex things will turn out well?  Today, we analyze the cash flow versus the capex of 43 U.S. E&Ps and discuss what it all means.

After weathering the oil price decline in 2014-16, U.S. E&Ps have been repositioning themselves to survive and even thrive in a $50/bbl world by (among other things) focusing on the sweetest of production sweet spots and wringing more oil, gas and natural gas liquids out of each well by drilling longer laterals, using more frac sand and fine-tuning their completion techniques. In late 2016, the 43 E&Ps we’ve been tracking in our recent Piranha report and related blogs announced a 42% increase in 2017 capital spending, and despite oil prices dipping below $50/bbl in the second quarter of 2017, our universe of producers remained committed to their accelerated investment plans (see Rock Steady). But as noted above, there have been indications that E&Ps have started to pull back somewhat, with a 5% decline in the rig count since the end of July cited as evidence. 

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A good way to assess what’s really going on is to look at the relationship between E&Ps’ expected cash flow and their capital spending. The collective numbers for our universe of producers indicates that the 43 companies are likely to outspend cash flow by less than 3% — a far cry from the 40% to 50% outspend that was a hallmark of the industry a half-decade ago. As we’ll get to, though, a closer look shows that planned 2017 investments by 24 of the E&Ps in our universe will exceed their cash flow, with one-fifth outspending 2017 cash flow by more than 50%.

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