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North American E&P Spend Seen Moderating, but Still Up by Double-Digits in 2023
Only a few U.S.-based exploration and production (E&P) companies have provided formal capital spending plans for 2023, but expenditures overall are forecast to decelerate from a year ago.
E&P executives are surveyed twice a year by Evercore ISI to determine the level of capital expenditures (capex) and activity, which often are revised. Respondents indicated that global spending should continue to rise, up by 14% from 2022. However, it’s down from the 2022 growth rate, when capital spending jumped 20% overall from 2021.
North America, however, is still seen with a solid gain in capex for 2023. “While we forecast growth to decelerate in both North America and internationally, North America’s impressive 18% end-of-year growth follows a near record 44% in 2022,” said Evercore managing director James West.
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U.S. E&P executives surveyed in late December were setting their capex for 2023 using an average oil price forecast of $78/bbl West Texas Intermediate (WTI) oil and $5.10/MMBtu Henry Hub (HH) natural gas.
“Average oil and gas prices of $125 WTI and $7.70 HH were cited for budgets to revise higher while $62 WTI and $3.25 HH were cited for budgets to revise lower,” West said. “With energy security, surety of supply and production capacity additions key drivers for a cyclical recovery in global E&P spending, we believe there is only moderate risk to our initial estimates for 2023 growth rates in the 15-20% range for all the key operating regions.”
U.S. natural gas futures averaged above $5.00 late last year, while NGI’s Spot Gas National Avg. surged to nearly $20 as freezing weather hit typically mild winter climates, including in California.
Although natural gas prices staggered into the new year, HH is set to recover to average near $5.00 through March, according to updated projections from the U.S. Energy Information Administration. The projections were published in the January edition of its Short-Term Energy Outlook.
Chevron, ExxonMobil Eye Americas
U.S.-based supermajors Chevron Corp. and ExxonMobil issued their capex plans in December. ExxonMobil’s 2023 capital budget of $23-25 billion has almost three-quarters directed to developments in Brazil, Guyana, the Permian Basin and for LNG projects. Through the first nine months of 2022, the supermajor had spent about $15 billion, implying full-year capex of around $20 billion-plus.
Chevron, which set a $17 billion budget this year, plans to spend nearly $8 billion for U.S. upstream projects, up 25% year/year. About one-half of the capex, $4 billion, is budgeted for the Permian, up by one-third.
Chevron’s capex plan, said CEO Mike Wirth, is “in line with prior guidance despite inflation. We’re winning back investors with capital efficient growth, a strong balance sheet and more cash returned to shareholders.”
The Evercore survey indicated that North American E&P capex “should increase by 18% in 2023, rising 6% above 2017 and within 5% of 2019 levels,” West noted.
This year may approach pre-Covid levels, he said.
“Building on strong growth in 2022, we project North American E&P spending to increase by 18% in 2023 to within 7% of pre-Covid levels. The U.S. should lead again with spending up 19% in 2023 while Canada moderates at 10.5%.”
Independents and private operators account for more than 70% of regional capex in North America.
“While privates were faster to increase capex post-Covid, the publicly traded independents shored up their balance sheets and prioritized returning cash to shareholders,” West noted. “We believe this trend could be reversing, with privates becoming more fiscally minded as service cost inflation begins to rise.”
The private E&Ps account for around 20% of Evercore’s U.S. capex estimate – but 6% of the rig count. That suggests that overall U.S. spending could be larger than Evercore’s estimate.
“Directionally our sample of private operators increased U.S. capex by 67% in 2022, accelerating from 56% in our mid-year survey and topping overall growth of 48% from independents…”
When all is said and done, if oil and natural gas prices were to hold at current levels, “we believe 2023 North American capex is at risk of slipping below our initial estimates,” West said. “At the current 17% rate, it would take five additional years (end-2028) for North American capex to recover to its historical 2014 peak.”
Exploration Spending Up
Nearly 25% of Evercore’s survey respondents plan to increase exploration spending in 2023, while around 10% expect to make reductions.
“This is similar to initial plans for 2022, with a two-year streak of higher planned exploration spending slipping slightly from 2.7-2.5 times for 2023,” the survey noted
“The economics of exploration are viewed by our survey respondents as excellent or good by a majority 63% in the U.S. but only 22% in Canada and 33% international, generally inline from 62%, 40% and 25%, respectively, one year ago.”
If commodity prices were to stage a sharp recovery this year, executives would remain wary. For one thing, oilfield services costs continue to rise. “Service availability” was the most cited potential bottleneck in the survey for E&Ps to miss their 2023 production targets.
“Higher service pricing that materialized in 2022 is expected to broaden in 2023, with pricing increases anticipated for fracturing/stimulation, drilling and completion equipment,” West said. ”Operators called out subsurface completion and production, and enhanced oil recovery, as areas in need of greater technology innovation…”
A “small but growing group of E&Ps are more likely to test and adopt new technologies and pay a bit more for service and technologies that lower carbon emission.”
Overall capex may be set to rise for North American E&Ps, but the gains may be mostly by the oil-weighted E&Ps – not the natural gas-weighted companies.
“Drillbit capital allocation has been top of mind with investors,” said analyst Matt Portillo of Tudor, Pickering, Holt & Co. (TPH). Recent conversations with the gas-weighted E&P executives “suggest that there so far is little movement on capital allocation plans in 2023.”
E&Ps working in the Appalachian Basin plan to “stick to maintenance capital plans,” and have more “growth aspirations” trained on the Haynesville Shale.
However, Portillo and the TPH team do not think the market needs incremental gas production growth. Ultimately, the market may “need to force the curve lower to push rigs out of the market,” he said. Executives “continue to see $3/MMBtu or less on strip, with duration, as a notable inflection point on capital.”
Mizuho Securities USA LLC analyst Nitan Kumar noted that U.S. E&P capex had declined overall for two years, primarily because of lower spending by U.S. onshore producers.
“Capex is in great part determined by the oil price environment,” Kumar said. Declines in prices, price volatility and a renewed vow to remain disciplined in spending have “led to lower investment plans that keep supply limited, therefore limiting the decline in oil prices (barring a collapse in demand).”
It still comes back to capital discipline and cash flow, according to Evercore.
“For the seventh straight year and eighth time in nine years, cash flow leads as the key determinant of E&P spending,” the survey noted. “A new record 88% of our survey respondents cited cash flow as a key driver of E&P spending, up from 77% in our 2022 survey and the previous record of 80% in our 2015 survey.”
Cash flow has ranked No. 1 or No. 2 as the leading determinant of E&P spending in all but four of the past 24 years in Evercore’s survey history. The price of oil has ranked Nos. 1, 2 or 3 since 2009.
“Natural gas prices reigned supreme from 2000 to 2010 with the onset of the gas shale revolution but have slipped in recent years to a lowly fifth place,” the survey noted. “Stronger balance sheets appear to be less of a gating pressure on E&P spending plans.”
Investor demands, combined with challenging market conditions, have forced E&P operators since 2018 to become more capital-disciplined.
“For 2023, strong capital discipline is extended again with another 88% of our survey respondents again planning to spend within cash flow versus only 13% that plan to draw down cash from elsewhere to fund capex,” the Evercore team noted. “A record 67% plan to generate excess cash, likely for paying down debt and returning cash to stakeholders.”
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