Despite a 12% decline in crude oil prices from their December 2016 highs, the 43 top U.S. exploration and production companies (E&Ps) we’ve been tracking are largely maintaining their aggressive 2017 drilling and completion capital spending plans, announcing a mere $1.0 billion — or 1.5% — decline in total investment since the plans were unveiled. The industry’s apparent confidence in the long-term profitability of its aggressive development of the major U.S. resource plays is in sharp contrast with eroding investor sentiment that has driven Standard & Poor’s (S&P) E&P Index 29% lower than its late-2016 peak. The companies that announced modest investment reductions — about one-third of our universe of 43 E&Ps — cited cost savings from increased drilling efficiency and divestments as well as the lower short-term price outlook as reasons for the cuts. Today we review the changes in the overall outlook for 2017 upstream capital spending and oil and natural gas production, and take a quick peek into our three peer groups: those that focus on oil, those that focus on gas, and diversified E&Ps.
How We Got Here
We analyzed in depth the ongoing transformation of the U.S. E&P sector in Piranha!, our market study of 43 top U.S.-based E&Ps that includes an examination of the strategies that E&Ps are adopting to thrive in a $50/bbl world. Of that universe of companies, 21 focus on oil (60%+ liquids reserves), nine are gas-weighted producers (60%+ natural gas reserves) and 13 are diversified producers. All major U.S. shale/unconventional plays are represented in the combined portfolios of these firms. Also, in several blogs over the past few months we examined details for each of these groups of companies and tallied the increases in capex the firms had planned for 2017. Today, we update these capital spending plans and oil and gas production expectations.
Where We’re Going
Figure 1 shows the updated 2017 capital spending plans by peer group based on guidance from second quarter earnings releases. Overall, 2017 capital spending estimates were lowered from initial plans by $1 billion to $54.7 billion (red rectangle). This still results in a 40% increase in outlays over 2016 capital investment. Fourteen companies announced capital spending reductions, while 10 boosted their spending plans, with the average decline outweighing the average gain. The dip in oil prices, which reduced unhedged upstream revenues in the second quarter of 2017, slightly eroded the confidence of some E&Ps, but companies also cited increased drilling efficiency and divestments as the reasons for at least some of the reductions in capital outlays. (As we discussed in Lifelines – U.S. Producers Boost Oil Hedges, most E&Ps have hedged at least a portion of their 2017 production at prices above $50/bbl, which acts as a buffer to lower oil price levels.)