Free Fallin’ – E&P Capital Spending Slashed but No Problem for Some of these Bad Boys

The E&Ps have cut Capex to the bone, but as a group they expect oil and gas production in 2015 to increase versus last year.  That’s true from an overall perspective, and it is an important indicator of upcoming production trends.  But the real revelations come when you dig into the details.  In the oily sector, small and mid-size companies are making deeper cuts but are faring much better than the big boys.  On the gassy side, E&Ps in Appalachia are knocking it out of the park, while more diversified gassy players are having a much harder time of it.   Today we begin a blog series to drill deeper into the company numbers to see why and how these differences happen.

We first looked into this issue back in January 2015 using an analysis of capex and production guidance provided by our friends at U.S Capital Advisors (see Rig Cuts Deep, Output High!).  This time we’ve crunched through the numbers based on data compiled from company’s SEC reporting and issued press releases.  Our analysis indicates a 37% decline in exploration and development spending in 2015 for a group of 31 exploration and production companies.  These very same companies are expecting to increase oil and gas production by 8% this year. The oil and liquids rich gas producers will see the brunt of the spending declines as the crude oil price decline has slashed cash flows, but the very profitable dry gas Appalachian producers will be moving full speed ahead despite low natural gas prices. This initial blog will provide an overview of our analysis, the next edition will review oil weighted E&Ps and the final posting will look at gas weighted companies.

Our analysis examined the capital spending, production and profitability trends among 31 E&Ps that produced an amount equal to about 36% of U.S. crude oil last year. The data used in the study is publicly available; contained in each company’s filings with the Securities and Exchange Commission (SEC) and press releases issued in the latter half of 2014 and in 2015.  The capital spending data point we used is exploration and development outlays, which includes only investment that targets the production of oil and gas and excludes capital used for the acquisition of oil and gas reserves and unproved properties.   Here we are comparing 2015 guidance with 2014 actuals.  To measure historical profitability we are using the “recycle ratio” which puts field profitability (netbacks) in context with finding and development costs.  Our profitability analysis looks at the 2012-14 timeframe. 

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.  Very simply, we assigned the label “oil weighted” to companies with an oil/liquids weighting over 50%, and the “gas weighted” label was given to companies with an oil weighting of less than 50%. Figure 1 shows the composition of the four peer groups.