EDITOR – OGFJ
THE WORST IS OVER, said oilfield service
giants Schlumberger and Halliburton
about the state of oil markets during earnings calls in late July. The downturn has
dragged on longer than many expected,
so there is something mildly comforting
about such a declaration, true or not, when
it falls from the mouths of dominant industry players. Perhaps even more so as
it comes during a month with a 12% drop
in oil prices that erased months of incremental gains. Those
gains helped spark hope that $60 oil was not far off. At press
time, $40 oil looks closer.
This kind of market volatility, not surprisingly, led the
industry to a state of reduction in every sense of the word.
For the sake of brevity, I’d like to focus on upstream capex
reductions by those in the US Lower 48. Recently, Wood
Mackenzie noted that “of the more than US$370 billion in
global capital expenditure cut by upstream developers across
2016 and 2017, US$150 billion was slashed in the US Lower
48 alone—more than three times any other single country.”
Along those lines, Cowen and Company said it expects to
see US spending decline 45% compared to its year-end 2015
estimate (published in January), which indicated a decline
of 22%. “The aggregate 45% decline is the most severe decline
in the history of this survey,” Cowen noted. The numbers
were published in July as a midyear update to its 2016 E&P
Spending Survey. Oil majors are still feeling the squeeze, and
are anticipated to reduce spending by 26%, Cowen analysts
said, but it’s the independents, the group most referenced
in OGFJ, that will continue to retract the most. The survey
noted an expected spending reduction by independents of
Of course, oil prices, and spending plans dependent upon
them, are moving targets. In terms of spending in the US
onshore, Cowen identified a few companies increasing 2016
budgets in step with oil price improvements. Three examples:
Pioneer Natural Resources, Devon Energy, and Energen.
In conjunction with its acquisition agreement with Devon
Energy to acquire approximately 28,000 net acres in the
Midland Basin for $435 million and management’s improving
outlook for oil prices, Pioneer Natural Resources expects to
increase its horizontal rig count by five rigs from 12 rigs to
17 rigs in the northern Spraberry/Wolfcamp in late 2016.
Surveys indicate hope
for decimated CAPEX budgets
The company’s 2016 capital budget is expected to increase
by approximately $100 million from $2.0 billion to $2.1 billion
as a result of the rig additions.
On the flipside of that transaction is Devon. The company
has entered definitive agreements to sell non-core assets to
the tune of $2.1 billion. The Oklahoma City, OK-based company now expects its full-year 2016 upstream capital program
to range between $1.1 billion and $1.3 billion, higher by $200
million at the midpoint. The incremental capital investment
will be deployed in the Delaware Basin and the Oklahoma
STACK play beginning in the third quarter of 2016 with the
addition of three operated rigs.
Energen increased its 2016 capex budget for a second
time, up 20% from its first revision and up 80% from its
Again, these are all moving targets, but it seems some
operators are cautiously optimistic about the prospect of a
moderate increase in prices, and thus, an increase in upstream
spending, possibly turning the tide for budgets slashed in
recent years. Further evidence of this was found Cowen and
Company’s E&P mid-year spending outlook survey, and
another from Evercore ISI.
For its mid-year survey report, Cowen and Company asked
companies to indicate the range in which they believe their
2017 capex would fall given an average oil price of $50 and
an average natural gas price of $4/MMbtu. Most respondents,
72%, said that they would increase their 2017 budgets relative to 2016, with 5% holding budgets flat and the remaining
23% decreasing 2017 spending. Importantly, 45% said that
their 2017 budgets would be up by more than 15%, while
27% expected an increase of 0-15%.
Results from Evercore ISI’s survey also looked at oil at $50,
with respondents similarly indicating an increase in upstream
spend next year if oil stays above $50/bbl for the remainder
of this year. Under that scenario, a strong 73% of those surveyed would expect to increase spending in 2017. Of those,
one-third expect to increase 2017 capex by more than 25%
relative to their 2016 spending levels, and 20% plan to increase
capex by up to 5%.
Cost cutting has been the rule in this post boom environment, but there are indications that prices will rise into 2017.
Rise or fall, companies will continue to adjust as prices move
the target. We’ll keep an eye on the process.