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I Can't Go for That (No Can Do), Part 2 – E&P Capex and Production Guidance, and Why They Aren't Doing More

There’s a lot of confusion out there — both in the media and the general public — about how producers in the U.S. oil and gas industry plan their operations for the months ahead and the degree to which they could ratchet up their production to help alleviate the current global supply shortfall and help bring down high prices. It’s not as simple or immediate as some might imagine. There are many reasons why E&Ps are either reluctant or unable to quickly increase their crude oil and natural gas production. Capital budgets are up in 2022 by an average of 23% over 2021. That increase seems substantial, but about two-thirds (15%) results from oilfield service inflation. And there are other headwinds as well. In today’s RBN blog, we drill down into the numbers with a look at producers’ capex and production guidance for 2022, the sharp decline in drilled-but-uncompleted wells, the impact of inflation and other factors that weigh on E&Ps today.

The oil-patch is notorious for its boom-and-bust cycles. For decades, exploration and production (E&P) companies followed an investment strategy that prioritized aggressive growth, including stepping up drilling-and-completion activity when crude oil prices climbed. With oil prices exceeding $100/barrel in 2014, the 43 oil and gas producers we closely monitor invested a whopping $130 billion in drilling and completion to ramp up output. And investors went along for the ride: The S&P E&P index hit a record 12,400 at the midpoint of that year. But the bloom went off the rose when oil prices plunged through the second half of 2014 and most of 2015. Investors left in droves, stock prices cascaded and E&Ps, laden with debt, teetered financially.

When COVID hit in the first few months of 2020, demand destruction of epic proportions caused prices and production to plummet, leaving the oil and gas industry virtually abandoned by investors and the S&P E&P index at 1,200 — only one-tenth its high point six years earlier. On top of that, the industry faced significant risk, not only from the pandemic, but also from the looming potential of an OPEC+ production increase and questions about the long-term prospects for producers as public perception shifted sharply against all things hydrocarbons, institutional investors divested from the sector for ideological reasons, and political opposition became a major hurdle (See Part 1 of this series for more.). To win back performance-minded investors, oil and gas producers instituted a structural strategic policy change, repositioning their equities as yield vehicles rather than growth stocks by drastically slashing capex and prioritizing free cash flow generation to boost shareholder returns. 

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