U.S. energy professionals are a bit more confident about oil prices today than they were a few months ago, when prices surprisingly and rapidly slumped, but they have no confidence that natural gas prices will gain much momentum in the longer term, a recent survey by Raymond James & Associates Inc. has found.
The annual North American Prospects Expo, i.e. NAPE Summit in Houston, is considered one of the largest gatherings to showcase products and services for exploration and production (E&P), oilfield services (OFS) and other energy industry professionals. In conjunction with NAPE, the team at Raymond James hosted its 17th annual dinner to gauge the mood of about 150 guests, mostly E&P executives, and analysts again relied on anonymous voting to grill the group on a variety of topics.
“The mood throughout the room appeared cautiously upbeat,” considering the difference in industry profitability at today’s mid-$50/bbl oil price versus the mid-$40s price in late 2018, said analyst J. Marshall Adkins and his colleagues. “In sum, the industry seems to be more bullish on oil than the futures markets, although not nearly as bullish as we are over the next year.
“On the other hand, the respondents (like us and the futures market) do not expect to see U.S. natural gas prices greater than $3.00/MMBtu any time soon.”
Executives were asked what they thought the best performing industry investment would be this year. Last year’s survey found only 6% of votes cast for natural gas, while 4% were for energy debt and 3% for refining equities, and “these were the first, second, and third best performing investments, respectively,” Adkins noted.
At this year’s dinner, E&P equities, the second worst performers in 2018, received the most votes (20%), followed by midstream equities (17%) and crude prices (15%).
“Interestingly, midstream's proportion of the vote is the highest it has been in several years,” which appears to make sense “as valuations in the sector are attractive and resilient U.S. oil production and booming U.S. natural gas demand and exports should be clear tailwinds for the group.”
On the other hand, OFS equities, which received the most votes in the past two years but were the worst performers each year, received only 10% of the vote in the latest survey. And “unsurprisingly (at least to us), natural gas came in dead last, receiving less than 3% of the total votes cast.”
In general, executives quizzed said they expect crude prices to end at $62/bbl this year, while natural gas is forecast to average $2.91/MMBtu. Expectations for U.S. gas “are higher than both the futures market at $2.81/MMbtu and our forecast of $2.80/MMBtu,” Adkins noted.
The “major shocks” to Raymond James’ E&P model last year were the large productivity gains in new U.S. onshore wells. “After several years of tallying plus-30-40% productivity growth, 2016 saw gains slow to 17% followed by gains of 11% in 2017,” Adkins noted.
“Intuition led us to believe this trend would continue in 2018, as we initially modeled 8% productivity gain assumption for 2018 wells.”
However, data suggests that the average new well in 2018 produced 19% more oil year/year, attributed to longer lateral lengths, more proppant loading, denser cluster spacing and adopting technology with leading edge designs.
U.S. well productivity gains are expected to slow to 10% this year and 5% in 2020 as proppant intensity and lateral length growth slow and "parent/child" well interference issues increase, according to Raymond James. Were the dinner guests in agreement?
Most (84%) of the executives surveyed said 2019 would be another year of consecutive productivity gains, but some acknowledged that headwinds such as parent-child well interference (28%) will play a large part muting the magnitude of gains.
“While prior years' results pointed to lateral length/sand loading maximization being the primary drivers to positive productivity, this year’s results reflected that the strategy of operational ‘finesse’ would yield positive gains -- in the form of denser perforation spacing (19%) and more meticulous lateral placement (18%),” Adkins said.
Executives also suggested that private/private equity (PE) investors are joining their public brethren by shifting to a broader strategy of growing within cash flow. They were queried as to whether E&Ps should stick with a returns-focused approach to capital allocation, a trend borne out in outlooks provided to date in fourth quarter 2018 results, with many operators targeting a cash flow neutral approach.
The majors, which have stepped up U.S. onshore spend, and the private operators, which lack the scale and wherewithal to rein in spending, should act as a counterweight “that will likely tip the balance once again toward a modest overall industry cash flow outspend,” Adkins said.
About 90% of the participants supported at least some production growth, but overall, there was consensus that “capital prudence may yet continue through 2019.”
The audience also was queried about industry consolidation activity this year. About 29% thought PE-backed E&Ps combining with other PE-backed firms would be the largest consolidation group for the year, reflecting a sentiment that the privates have to not only prove operations and acreage quality, but build scale and create line of sight into positive cash flow generation before a viable exit.