Where Has All the Capex Gone? E&P Investment Down Despite Rising Prices and Cash Flows

Everyone knows the old saw, “Make hay while the sun shines.” Oil and gas producers have historically honored this sentiment by boosting their capital spending when commodity prices were high and cutting back when realizations dipped. Their investment peaked in 2014, when oil prices were hovering over $100 per barrel, plunged with the price crash in 2015-16, recovered with $70 oil in 2018, and crashed again in the ugly early days of the COVID-19 pandemic. The sun is out again in 2021, but E&Ps seem to have tossed out their old mantra in favor of fiscal discipline, setting and maintaining investment at historic lows despite solid oil prices and surging gas futures. In today’s RBN blog, we review mid-year changes to E&P capital budgets and their impact on oil and gas production.

Before we get to 2021, let’s take a deeper dive into historical spending patterns. Capital spending by the 38 E&Ps we monitor peaked at just under $130 billion in 2014, when the price of WTI (blue area and right axis in Figure 1) was in triple-digit territory. That investment funded an extraordinary level of drilling activity: as many as 1,600 oil-focused drilling rigs (dashed green oval, orange line, and left axis) were at work at the time. After oil prices plunged below $40/bbl in late 2015, investment and drilling activity dipped below $40 billion and 350 rigs, respectively, in 2016 (dashed yellow oval). Capital spending and rig counts doubled in 2018 when oil prices surged above $70/bbl. Then the pandemic brought drilling activity nearly to a halt in early 2020 (dashed white oval) and total capital spending fell to $36.5 billion for the year. As we discussed in A Well-Respected Man, oil and gas producers maintained a conservative investment approach to 2021 as we emerged from the darkest clouds of the pandemic and prices began to recover. However, oil prices have surged to over $70/bbl, nearing their previous 2018 highs. The big question was, would E&Ps revert to their historical pattern and resume drilling to capture increasingly attractive margins.  The answer so far is no.

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