Battered by seismic economic shocks from sudden demand destruction and plummeting prices in the early days of the COVID-19 pandemic, exploration and production companies (E&Ps) abandoned their carefully crafted 2020 strategic plans and financial guidance and shifted into emergency survival mode to protect their financial stability. First-quarter earnings calls sounded more like FEMA disaster briefings than standard financial reporting as the companies announced aggressive capital and operational cost-cutting measures. But few E&Ps detailed the timing and duration of the investment reductions and the degree to which they would impact oil and gas production for the remainder of the year. Now, with second-quarter calls behind us and the third quarter about to end, there’s a lot more clarity on the capital spending and production fronts. Today, we discuss the evolution of E&Ps’ 2020 spending plans and how the changes will affect production for the balance of the year.
We have been tracking the E&P sectors’ response to the upheavals of 2020 in a number of blogs, beginning with Paint It Black in mid-March and Eve of Destruction in early April. In those blogs, we discussed the initial round of capex cuts and the fact that the cost structure for at least some E&Ps may threaten their financial viability if crude oil prices stay very low. Then, in Too Soon to Know, we took a midyear look at the E&Ps’ capex cuts and the effects they were having on production. Most recently, in Getting Better, we reviewed the producers’ mostly dire second-quarter results, and previewed third-quarter results that are likely to show at least the beginnings of a comeback.
The overall theme of today’s blog on exploration and development (E&D) capex is that U.S. E&Ps continue to take a very conservative approach to investment, maintaining their reduced second-quarter capital spending levels for the remainder of 2020. After slashing 2020 capital expenditures by 40% from their original guidance after the onset of the COVID-19 pandemic in the U.S. at the end of the first quarter, the 40 E&P companies we monitor announced only minor revisions to their full-year 2020 guidance in their mid-year results announcements in late July and August. (When guidance was not provided, we made an estimate.) As shown in Figure 1, 2020 E&D capex annual guidance declined 4% in the second quarter of 2020 to $35.4 billion (multicolored bar to far right; left axis) from $36.8 billion in the first quarter and 42% from the original capex guidance of $60.5 billion established earlier this year. This level of investment is half of the amount spent in 2019 and more than 70% below the amount invested in 2014 (multicolored bar to far left), when oil prices were sky-high and E&Ps’ capex peaked.
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