You Go Your Way, I'll Go Mine - Oil-Weighted E&Ps Put the Brakes on Capex Cuts, But Location Matters

The group of 21 liquids-focused exploration and production companies we have been tracking plans to cut capital expenditures by half in 2016, after a 42% decline in 2015. However, capex for this “oil-weighted” E&P peer group is apparently bottoming out—their mid-year guidance was only 2% lower than their original 2016 estimates. Even with deep cuts in capital spending, the group expects production to fall only 7% in 2016, and those estimates have been revised higher from the initial 2016 guidance.  Also worth noting: Pure Permian Basin players, the most optimistic companies in the peer group, are cutting capital spending by only 19% and are expecting a 12% gain in production.  And with Apache Corp.’s announcement earlier this week of a huge discovery in the Permian’s Southern Delaware Basin, the market is definitely making a turn. Today we discuss 2016 capex and production for a representative group of E&P companies whose proved reserves are more than 60% liquids.

RBN Energy has been closely following industry investment for the past couple of years. Most recently, in Been Down So Long, we analyzed second quarter 2016 capital spending and production trends for 46 U.S. E&P companies of all stripes—that is, Oil-Weighted E&Ps; Diversified E&Ps (with proven reserves that are 40 to 60% liquids); and Gas-Weighted E&Ps (with proven reserves more than 60% natural gas).  We showed that overall capital spending among the 46 companies is expected to be about 50% lower this year than in 2015, and that when combined with 2015 capex cuts of nearly 40%, 2016 capex is 70% lower than it was two years ago. The good news, however, is that downward capital spending revisions were minor in the second quarter of 2016—only 2.5% below 2016 initial capital spending guidance. We take that as a sign the capital spending bottom has been reached. We also noted that the companies expect production to be only 4% lower in 2016, a less steep decline than the original 2016 guidance because of the recovery in oil prices and a continued dramatic decrease in costs. 

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In this episode, we are focusing on the 21 Oil-Weighted E&Ps on our list. In Figure 1, we show that the Oil-Weighted E&Ps are cutting capital spending by half in 2016 (blue circle) after a 42% decline in 2015. Cumulatively, the oil-weighted peers have reduced exploration and development spending by over 71% since 2014 to just $18.4 billion as of their second quarter 2016 updates. But a new optimism seems to be taking hold in the industry, driven by higher oil prices and continued –– and significant ­­–– declines in drilling and completion and lease operating costs. Estimated output this year among the 21 E&Ps is down only 7% from last year (red circle). That positive attitude has driven a dramatic 20% increase in the U.S. rig count since late May 2016 after a more than two years of rig-count declines.

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