While soaring commodity prices have been the most important driver of record E&P cash flow generation over the past 12 months, shareholders have also benefited from a new, post-pandemic financial discipline that has lowered the industry’s reinvestment rate to an all-time low of 35%. However, the 2022 capital expenditures initially planned by the 42 U.S. producers we track were expected to rise a healthy 24% over 2021 levels and their spending plans for the just-finished year continued to increase as 2022 wore on. While only a handful of E&Ps have released their actual 2023 budgets, their most recent conference call comments suggest that the investment momentum will keep building in the new year. In today’s RBN blog, we analyze producers’ 2022 capital investment and the key indicators for 2023 growth.
In their 1965 song, “It’s Growing,” the Temptations croon about “a snowball rolling down the side of a snow-covered hill.” This concept of momentum is highly relevant to the pattern of E&P capital investment since the beginning of 2022. The major nudge that started the snowball rolling was the widespread post-pandemic inflation that roiled the oil and gas industry as well as the global economy. As we discussed in our early-2022 blog, I Can’t Go for That (No Can Do), an estimated 10%-20% of oilfield-service inflation was the primary driver in the 24% increase in capex that the E&Ps we monitor were initially planning for 2022. (The 42 producers invested $39.7 billion in 2021 and planned to ramp that up to $49.3 billion last year). That $49.3 billion was then increased by 3%-4% in each of the first three quarters of 2022 as E&Ps expanded their drilling plans to counter a steep drawdown of drilled but uncompleted wells (DUCs) over the previous two years as well as adjusting capex for continuing oil-field service inflation. The evidence includes a 32% increase in U.S. land-based rigs, from 586 at year-end 2021 to 779 at year-end 2022.
As shown in Figure 1, our current capital investment summary, based on Q3 2022 reporting, now estimates that 2022 capex by the 42 E&Ps will total $54.9 billion (multicolored bar to far right, left axis), a 38% gain over 2021. This includes a 27% increase for Oil-Weighted producers (blue bar segment), a 44% gain for the Diversified E&P peer group (orange bar segment), and 54% growth for the Gas-Weighted E&Ps (gray bar segment). Only two companies out of the 42 were budgeting lower investment. Full-year 2022 oil and gas production estimates for the group (yellow line, right axis) now show an increase of 9% in 2022, up from the initial estimate of a 7% gain, the increase driven in part by significant acquisitions by several producers. That’s the highest production growth rate since 2017.
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