Rystad Energy: Shale Newsletter - August 2019 - eng
US shale operators manage to raise production targets yet stay thrifty
Second quarter 2019 results from US E&P operators signal tightening capital budget guidance ranges amid continued capital discipline, coupled with marginal upward production revisions. Given the front-loaded capital programs observed for the majority of companies in the analyzed peer group, for the second half of 2019 we expect cash flow generation on the back of production growth and lower spending. Rystad Energy analyzed the results of around 50 US onshore operators and found that most reported unchanged or reduced capital spending expectations. The biggest capex reductions came from Permian-focused companies, as well as operators active in multiple plays, such as Noble Energy and Devon Energy. Most companies reported increased production targets, albeit with a few exceptions such as Apache, Oasis Petroleum and Whiting Petroleum, which are feeling the squeeze of infrastructure constraints.
ConocoPhillips stands out with an increase of around $100 million in its capital budget on the back of a drilling rig to be added in the Eagle Ford basin in 3Q19. Among the Bakken-focused companies, Enerplus Corporation has tightened its capital budget range, increasing the lower end estimate from C$590 million to C$610 million, while Oasis Petroleum raised its capital budget to between $620 million and $640 million (an increase of around 15% compared to the previous guidance). However, it should be noted that while most of the company’s production comes from the Bakken, the capex revision is driven primarily by higher drilling activity in its Permian Delaware acreage, as well as revised cost deflation expectations and higher non-operated activity.
Figure 1 shows that most reductions in capital budgets among the peer group of companies are observed for Permian pure-play or Permian-focused operators. QEP Resources reports a reduction of around 8% at the midpoint of guidance, with projected D&C investments reduced by about $35 million, and a further $15 million reduction is expected in infrastructure capital. Pioneer Natural Resources and Parsley Energy are both tightening their 2019 capital budget guidance. Pioneer has reduced the top end of its D&C capital program by $100 million while maintaining planned activity levels, averaging 21 to 23 horizontal rigs in the Permian Basin. Parsley Energy had reduced both the lower and upper ends of its capital guidance by $50 million and $60 million, respectively. Similarly, Diamondback Energy had narrowed its 2019 capital guidance range to between $2.725 billion and $2.95 billion (from $2.7 billion to $3 billion previously). Another key Permian Basin operator, Concho Resources, while keeping its capital spending budget unchanged, had reported plans to moderate activity, building up an inventory of drilled uncompleted wells.
A number of operators have also reported that they are tightening their guidance range, leading to little or no changes in the midpoint guidance. During 2Q19, capital expenditure guidance for selected shale producers in the US decreased by $150 million, or 0.2% relative to initial guidance. Figure 2 compares the original capital budget for 2019 with the new revised target as of 2Q19, split by the primary area of operations. The largest downward revisions are seen for key multi-play and Permian Basin operators, while Bakken-focused operators, as well as ConocoPhillips among the majors, have revised capex guidance upwards.
Among the multi-play companies, Devon Energy had lowered its capital outlook by $50 million, backed by improving efficiencies and lower costs in the Permian Basin, Eagle Ford and the Powder River Basin (PRB). The company had announced a shift of capital from the STACK play to Permian Delaware and PRB. Another key multi-play operator, Noble Energy, lowered its full-year capital plan by around $100 million, primarily in US onshore.
Full-year 2019 capital discipline, as shown by unchanged or reduced capital budgets, combined with the spending to date in the first half of 2019, positions the majority of shale operators within the analyzed peer group for a front-loaded 2019 capital program. Figure 3 shows the percentage change in the implied 2H19 capital investments compared to the actual reported 1H19 spending, based on the updated full-year 2019 capital budgets. We observe that for most operators the spending is expected to be lower in the second half of the year. Hess, a Bakken-focused operator, is a notable exception to the trend, with significant growth in investments expected in 2H19 vs 1H19. Having spent almost $600 million to date in North Dakota, Hess’ capex is estimated to increase in 2H19, supported by completions back-loaded towards the second half of the year.
Not all companies are pushing capital spending to the second half of the year. Murphy Oil, with US onshore operations in the Eagle Ford, has a front-loaded capital program for 2019, with 60% of the capital budget already spent in 1H19. In addition to the high planned completion activity in 2Q19, the company brought another 12 wells online in June, ahead of schedule. In the Appalachia region, CNX Resources had already spent around 60% of its 2019 capital budget. Similarly, Utica operator Gulfport Energy had invested around $440 million in 1H19, representing more than 70% of its 2019 capital budget. The higher spending in the first half of the year is primarily a result of expenditures incurred on non-operated activity in the Utica Shale.
In the Niobrara shale play, both High Point Resources and PDC Energy are expected to see lower spending in the second half of the year in order to adhere to the communicated capital budgets. Additionally, PDC Energy had lowered the upper end of its 2019 capital budget guidance by $30 million, planning to reduce the rig count in the Wattenberg field from three to two in September 2019. The company projects minimal Wattenberg completion activity in 4Q19, while in the Delaware Basin it had already decreased its rig count from three to two rigs and released its completion crew in July.
While the majority of US onshore operators have maintained capital discipline with limited capital budget revisions during the 2Q earnings season, oil production guidance had seen a modest increase, most notably for Permian-focused operators. Figure 4 shows the revisions in 2019 oil production guidance by company type. A slight reduction is observed for Bakken-focused companies, while operators active in the Permian Basin have on average revised oil production upwards during 2Q.
Figure 5 provides a more detailed look into operator-level revisions reported during the quarter. Overall, Permian companies increased oil production targets the most.
Laredo Petroleum had reported an upward revision to its oil production guidance of around 5%, having exceeded expected production volumes during the first half of the year. A similar revision was seen for Centennial Resource Development, which increased its production guidance for the year due to better than expected well results and increased efficiencies. WPX Energy had raised its full-year oil production guidance by 4% during 2Q while at the same time maintaining its capital budget. Parsley Energy had increased both the lower and upper ends of its oil production guidance, leading to a 4% upward revision at midpoint. Among other Permian-focused companies, SM Energy, Cimarex Resources, Matador Resources and QEP Resources have increased oil production guidance by between 1% and 3%. Devon Energy, categorized as a multi-play company active in Eagle Ford, STACK and Permian Delaware, had raised its oil production outlook during 2Q19, driven primarily by improved well productivity in Permian Delaware.
In contrast, PDC Energy, Apache and Whiting Petroleum have revised oil production expectations downward by between 5% and 7%. In the Bakken, Whiting Petroleum, as well as Oasis Petroleum, were negatively impacted by natural gas processing downtime and other operational delays during the quarter. For Whiting this had led to a downward revision in guided 2019 production as the company expects the infrastructure constraints to persist through the second half of the year. Similarly, Apache has revised its production guidance downward as a result of delays in the Midland and Delaware basins, as well as gas production deferrals at Alpine High. PDC Energy, active in the Permian Delaware and Niobrara, had increased the lower end of its total production guidance, while at the same time reducing the expected oil share in the commodity mix from between 41% and 45% to around 40%, leading to a slight reduction in oil production guidance for the year.Results for 2Q19 have, on average, demonstrated the ability of US shale operators to deliver on production guidance expectations, and to further raise production targets while staying within capital budgets. Even accounting for infrastructure constraints and production downtime experienced by some operators during the quarter, the majority of companies with US shale operations are on track to deliver on cash flow and capital discipline goals set for 2019.