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U.S. Upstream Capex Curtailments Twice Global Average, Says Raymond James

Global upstream spending began to peak last year before the oil price meltdown, but the sharp cuts in capital expenditures (capex) for 2015 have moved into a league of their own, i.e. "austerity on steroids," according to Raymond James & Associates Inc.

The capex reductions by global exploration and production (E&P) companies is estimated to be 20-25%, the lowest level since 2010, said analyst Pavel Molchanov and research associate Carlos Newall. The duo reviewed 34 large, mostly multinational public companies, including 14 U.S.-based E&Ps, that represented a "broadly representative proxy" for activity outside of OPEC control. Industrywide data was provided by Wood Mackenzie Ltd. The E&Ps comprised 60-70% of global upstream capex, and they covered all activities from conventional/unconventional, deepwater, oilsands, liquefied natural gas and frontier exploration.

What the Raymond James analysts discovered is that aggregate global capex actually peaked in 2013. Last year spending was down 7% from a year earlier.

"However, the superficial cuts of 2014 are nothing compared to what is being done this year," said Molchanov. "Based on the official budgets disclosed thus far (almost all of them), we project an average cut of 22% in 2015 -- taking total spending back to 2010 levels. Put another way, just these 34 companies wiped out $100 billion of 2015 spending."

In the United States, and specifically onshore Lower 48, E&P capital spending has experienced "an utter collapse." The United States experienced more upstream spend in the 2011-2014 period, and it's now seeing the opposite effect. Domestic spending has been curtailed at about double the global average, the survey suggested.

One year ago Molchanov had completed a similar capex survey, finding that global upstream capex was on the cusp of peaking and probably would post the slowest increase since the Great Recession (see Daily GPI, April 7, 2014). The U.S. onshore, he said at the time, was one of the bright spots for capex.

The budget reductions this year should result in a global market rebalancing, but more pain is likely ahead of an upcycle, Molchanov said.

His comments preceded an announcement late Monday by Chesapeake Energy Corp., which cut its capex plans only announced a month ago (see Shale Daily, Feb. 25). The independent  readjusted its 2015 spending plans by cutting $500 million and now plans to spend $3.5-4 million in 2015. The production outlook was cut to 1-3% from 3-5%. The average rig count is set to fall to 25-35 from 64 in 2014.

"Spending plans for 2015 at this point are still subject to adjustment in many cases, but the really key question is: where will oil prices be at the end of 2015 when the 2016 budgets are going to be decided?" Molchanov said. While cost structure reductions may play a role, prices would need to be higher by the last quarter of 2015 to support a "sustainable" level of investment in 2016.

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