The Upside of Down - Early 2019 E&P Guidance Shows Falling Capex But Solid Production Growth

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.

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