When legendary University of Texas football coach Darrell Royal was asked how he approached important games, he frequently said, “You dance with the one who brung ya,” which meant sticking with the strategy that produced previous success. After struggling through a period of extreme price volatility in 2014-20, U.S. E&Ps finally locked onto a game plan that works: They wooed back investors and regained financial stability by focusing on generating free cash flow and returning a lot of that bounty to shareholders. In today’s RBN blog, we analyze E&Ps’ 2024 capex and production guidance, which shows that producers have embraced Royal’s concept of sticking with what works.
After the price plunge at the onset of the pandemic in early 2020, the 40 E&P companies we cover (every U.S. E&P with a market cap of over $500 million) slashed capital investment by 50% to just $33 billion to conserve cash. Despite a price recovery, spending inched up only 5% in 2021 to $34.8 billion. However, 10% to 20% inflation in oilfield goods and services, combined with the need to boost the inventory of drilled but uncompleted wells (DUCs) after a steep pandemic drawdown, drove a 24% increase in initial 2022 investment guidance to $43.2 billion. As we reviewed in Take It Easy, sustained high commodity prices allowed producers to increase drilling to offset steep shale decline rates, leading to substantial quarterly increases in investment that resulted in total 2022 capex of $52.7 billion, up 51% from 2021 and the largest growth rate in over a decade. The result was a 7% increase in total production to 4.7 billion boe, surpassing the pre-pandemic 4.5 billion boe produced in 2019. High realizations also allowed E&Ps to dramatically accelerate dividends and share buybacks that had successfully won back investors.
Inflation as well as increased organic capital outlays related to acquisition activity led to another 25% increase in 2023 investment to $65.6 billion, just short of the $66.2 billion spent pre-pandemic in 2019. Production growth last year was a still-healthy 7%, to 4.8 billion boe. However, declining cash flows from lower commodity prices drove the reinvestment rate — i.e., the percentage allocated to capital spending — from an all-time low of 39% in 2022 to 76% in Q2 2023. The subsequent squeeze on free cash flows led some producers to debt-fund dividends to avoid dramatic decreases in shareholder returns. Cash flows improved modestly with prices in Q3 2023 but dipped again in Q4. As we reviewed in I Can See Clearly Now, second-half guidance reflected a halt in capex growth as producers weighed their 2024 investment priorities: boosting free cash flow or continuing production growth?
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