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U.S. E&Ps Wary of Rising OFS Costs, Living Within Cash Flow, Says Raymond James

U.S. exploration and production (E&P) management teams expect their biggest hurdles this year will be rising service costs and an effort to thrive within cash flow, according to a survey by Raymond James & Associates Inc.

At its 39th annual investor conference, analysts hosted a dinner of about 150, where attendees were asked to respond anonymously to a series of questions. The dinner crowd was composed of about 60% buy-side investors and 25% energy executives.

“Similar to years past, rising service costs were viewed by respondents as the top E&P headwind in 2018 at 36% of the vote,” said analyst J. Marshall Adkins. Higher oilfield service (OFS) costs were also the No. 1 hurdle listed by 33% in the firm’s survey taken at the annual NAPE dinner in February.

“The second most common answer was “living within cash flows” at 23% of the vote, which should come as no surprise given that 75%-plus of dinner attendees were institutional investors or public E&Ps,” said Adkins. “Make no mistake about it, this topic matters and publicly traded E&P companies are paying attention.”

A “highly confident” consensus among the dinner guests was that OFS costs will rise in 2018, but to what degree remains up for debate.

As far as constraints in the onshore, the overwhelming answer was increased trucking costs, an answer by more than half of the guests surveyed. Respondents also foresee higher costs from fracture spreads (17%), drilling rigs (11%) and coiled tubing (11%).

“We are largely in agreement with these results, and our research indicates labor, cementing, wireline, high-spec drillpipe, and chemicals are very tight as well,” said Adkins.

As to pricing expectations, the crowd was bullish oil and bearish yet again on natural gas.

“Although this is arguably shaping up to be the best year in history for U.S. natural gas demand growth, supply growth is simply way too strong,” said Adkins.

Nearly all (90%) of attendees expect U.S. gas prices to average between $2.50 and $3.25/MMBtu, but most (80%) pegged the average price this year at below $3.00.

“This is about in line with the futures curve at $2.85/MMBtu,” Adkins noted. “Our Henry Hub natural gas average price forecast for 2018 is $2.75.”

The dinner crowd forecast oil prices to average $60-70/bbl West Texas Intermediate this year, versus a strip average of $58 and Raymond James forecast of $70.

Raymond James’ bullish oil view comes with a “booming” Permian Basin associated gas production growth outlook, “while the gassier Marcellus/Utica and Haynesville should also contribute year/year supply growth.”

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