Slow It Down - U.S. E&Ps Temper 2023 Capex Increases After Aggressive Late-'22 Investment Spurt

In marking the third anniversary of COVID’s onset, the Washington Post detailed a study that showed most of us are already shedding the virus-impacted memories of that tedious and often traumatic time to concentrate on looking ahead — a trait scientists label “future-oriented positivity bias.” That transition was clearly evident in the 2022 investment decisions of U.S. E&Ps as the capex budgets of the 42 companies we monitor, pared to the bone during the pandemic, expanded through last year from initial guidance of a 24% increase over 2021 to a final 54% reported increase for the full year. They increased production by 9% year-over-year, but producers haven’t forgotten fiscal discipline or a focus on cash flow generation. In today’s RBN blog, we analyze 2023 capital budgets that generally sustain the pace of Q4 2022 spending and eschew additional increases in a lower commodity price environment.

The commodity price plunge at the onset of the pandemic in March 2020 sent shock waves through the oil and gas industry. The 42 producers in our universe, which includes every publicly held U.S. E&P with a market capitalization over $500 million (but not integrated energy companies like ExxonMobil and Chevron), slashed investment by 50% in 2020 to $37 billion from $74 billion in 2019, as shown by the stacked bars (and left axis) in Figure 1. Despite a substantial recovery in realizations, investment inched up just 6% to $39.7 billion in 2021. Estimated oilfield service inflation of 10%-20% and the need to rebuild the inventory of drilled but uncompleted wells (DUCs) after a steep pandemic drawdown drove a 24% increase in initial 2022 investment guidance to $49.3 billion. However, sustained high commodity prices resulted in surging cash flows, allowing producers to dramatically increase shareholder returns and increase drilling to more than offset steep short-term shale decline rates. As we pointed out in It’s Growing, our blog on Q3 2022 investment, capital budgets increased 3%-4% in each of the first three quarterly reporting periods to $54.9 billion — a 38% gain over the previous year. Full-year results revealed a dramatic and unprecedented 12% investment growth in Q4 compared with Q4 2021, raising total expenditures 54% to $61.6 billion, the largest year-on-year growth in more than a decade.