One of life’s vicarious pleasures is indulging in some daydreaming about what we’d do with a substantial financial windfall, maybe from a lottery win, a bequest from a long-lost relative, or a five-horse parlay. Thanks to a dramatic surge in post-pandemic commodity prices, U.S. E&Ps are living out that dream as 2022 cash flow from operating activities (CFOA) is on track to quadruple from 2020 lows and more than double from pre-pandemic levels. In allocating those funds, producers face the same kinds of decisions we would all face: ramping up current spending, whittling away at debt, tucking cash away for a rainy day, or distributing funds to family and friends. Possibly influenced by the upcoming holiday season, oil and gas producers turned extremely generous in the third quarter as shareholder returns reached record levels. In today’s RBN blog, we detail the cash-flow allocations made by the 42 publicly owned E&Ps we follow and speculate on future trends.
Let’s take a quick look at the largesse. The cash flowing into the coffers of the companies we track is on pace to exceed $160 billion, or $45 per barrel of oil equivalent (boe) produced, this year. CFOA hasn’t exceeded $25/boe since 2014, when oil prices last topped $100/bbl. The estimated 2022 result is 25% higher than the $36/boe generated in 2014, 4x the $11/boe reported in 2020, and 125% more than the $20/boe in 2021. Most impressively, the total cash generated this year is estimated to be $15 billion higher than the total net debt of the 42 producers we track.
The funds generated far exceed the disciplined post-pandemic investment programs adopted by the major E&Ps, who have dramatically shifted strategy from growth to cash flow generation. As shown in Figure 1, in 2019, capital investment of $89 billion exceeded CFOA by $16 billion, or 22%. In COVID-impacted 2020, producers slashed capital spending by 60% to just $36 billion, which represented 84% of cash flow. That reinvestment rate dropped to 43% in 2021 as investment rose just 12% while soaring commodity prices more than doubled cash generation from $42 billion to $93 billion. As we discussed in I Can’t Go For That (No Can Do), our series of blogs on capex and production guidance, 2022 capital budgets rebounded from $40 billion to $60 billion — an increase driven by 20-25% inflation in oilfield-related costs and the need to ramp up drilling after a steep drawdown in the inventory of drilled but uncompleted wells (DUCs) over the previous two years. However, rising commodity prices more than offset the impact of higher investment: Capex represented just 35% of E&Ps’ Q3 cash flow and 38% of their cash flow in the first nine months of 2022.
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