Hurricane Harvey and major flooding in Houston and other areas may affect energy markets and lead the 21 exploration and production companies in our Oil-Weighted Peer Group to readjust their 2017 investment programs. But in the weeks leading up to the Lone Star State’s most catastrophic weather event in decades, these E&Ps remained committed to their sharply accelerated 2017 capex plans. Their updated guidance issued with first-half 2017 earnings releases reveal a 44% increase in 2017 capital spending over 2016’s level to $26.5 billion, only a 2% reduction from the $27 billion initially budgeted for this year. The peer group also stayed confident in the long-term profitability of the major U.S. resource plays, which are receiving 80% of their 2017 capex, despite investor concern about lower prices that have triggered a 23% decline in the median enterprise value per barrel of oil equivalent for the Oil-Weighted peers since December 2016. Today we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on oil.
How We Got Here
Closely tracking a sizable and representative group of E&Ps is one of a number of complementary ways to assess the current status of — and the prospects for — the energy sector as a whole. In Piranha!, our market study of 43 top U.S.-based E&Ps, we examined 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. Then, 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 planned for 2017.
With all of our 43 companies now finished with their second-quarter/first-half earnings announcements and conference calls, it’s time to provide an update of their 2017 capital spending plans. We started the update in Rock Steady with a big-picture look at all the companies we track. There, we noted that 2017 capital spending estimates for the E&Ps were lowered from initial plans by only $800 million to $54.7 billion — a level still 40% higher than their 2016 capex. 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.