Once the “riverboat gamblers” of U.S. industry, executives at exploration and production companies got religion after the brutal oil price crash in late 2014 and adopted a far more conservative approach to investment based on their new 11th commandment: “Thou shalt live within cash flow.” So it’s no surprise that early 2019 guidance issued by more than half of the 45 major E&Ps we track shows them cutting back capital investment in response to last fall’s decline in oil prices from a more optimistic scenario a year ago. Nearly three-quarters of the 26 companies reporting their 2019 guidance are reducing exploration and development outlays, while only three of the remainder are budgeting increases greater than 10%. What is surprising is that these forecasts include solid production growth virtually across the board, especially for E&Ps that focus on crude oil. Today, we look at how a representative group of U.S. E&Ps are dealing with lower crude prices.
How We Got Here
The oil and gas industry slashed investments after the price of benchmark West Texas Intermediate (WTI) plunged below $30/bbl in early 2016, but a near doubling of prices by the end of that year resulted in an average 42% increase in capital expenditures in 2017. Despite price volatility in the first half of 2017, producers stuck with their early guidance and were rewarded by a second-half recovery that generated substantial profits after two years of massive losses. Oil prices ended 2017 about 20% higher than a year earlier, but E&P managements only budgeted a cautious 4% increase in exploration and development costs for 2018 and again left those budgets largely unchanged even as oil prices increased nearly 25% in the first nine months of last year. The wisdom of that conservative approach was apparent when WTI nosedived from $75/bbl in early October (2018) to $45/bbl in December. A modest recovery has followed in January-February 2019, but producers have been paring their capital expenditures to pre-2018 levels, and keeping their spending within cash flow to maintain solid balance sheets while awaiting more sustained gains in prices.