Rystad Energy: Shale Newsletter - March 2018 - eng

The big spring clean – shale companies  optimizing their portfolios

Since February 2018, in a move that looks like a “spring cleaning” of their portfolios, several companies have announced a shift of their focus on the main US shale plays by optimizing their portfolios through acreage transactions. US onshore shale producers are also boosting capital expenditure by 20% and increasing production guidance. In the Permian, producers are indicating a 40% year-on-year increase in oil volumes, equating to 850,000 boe/d, by the end of 2018.

Portfolio restructuring

By optimizing their acreage portfolio, shale companies are effectively deciding which of their assets strike a good balance between risk and return. The acreages that do not meet the threshold are usually sold or traded for core acreage, in order to ensure that the company is able to ensure growth, while ultimately staying cash flow positive.

Figure 1 illustrates the shift in portfolios by looking at the changes in 2018 production guidance, across different hydrocarbons. The companies in the peer group were chosen among the ones that recently have closed, or at least announced portfolio-altering transactions. 

As an example, QEP Resources is on track to becoming a pure Permian player by divesting its acreage in the Bakken, Haynesville, and Uinta, representing approximately 85% of its total net footprint and 62% of its 2017 gas production. Earlier last year, the company sold its Pinedale acreage in Wyoming, which at the time contributed 31% of its total gas production.

Pioneer Natural Resources, meanwhile, announced a capital investment plan of $2.9 billion, focused entirely on its Permian Midland acreage, and the upcoming divestment of all its non-Permian assets, such as Eagle Ford, Raton, and West Panhandle assets. Thus, we observe a flat production guiding relative to the total reported for 2017 as the Permian Basin production increase will absorb the effects of the divesture. Likewise, WPX disposed of its gas legacy position in the San Juan Basin in order to direct the proceeds towards Bakken and Delaware assets.

This trend is not limited to the Permian Basin alone. Since the beginning of the year, we have observed that non-Permian operators are also monetizing acreage positions that are slower in cash generation. Chesapeake is poised to complete the divesture of its Mississippian Lime acreage by the end of the second quarter 2018, and Devon Energy recently sold its southern Barnett assets for $533 million to a private Texas-based company and decreased activity in other non-key areas in order to focus on its Permian and STACK assets. Farther north, Whiting Petroleum is looking to sell its Niobrara/Redtail operations in order to focus on highest-rate-of-return projects in the Bakken. 

Capital expenditure

After looking at how companies reorganized their portfolios, it is important to analyze the amount of spending that will go into the newly streamlined operations. Rystad Energy reviewed US onshore producers’ guided E&P investments for 2018 and compared those against their reported 2017 capital expenditures. The results for a selection of 25 companies are depicted in Figure 2. Total E&P capex for all analyzed companies amounted to around $50 billion in 2017, and operators are guiding a 20% increase in spending on average for 2018. EOG Resources, Oxy and Chevron stand out as companies significantly increasing their shale capital expenditures this year. Oxy and Chevron are boosting capex in the Permian plays, while EOG Resources is planning to invest more in several high-rate-of-return oil assets, including the Permian Delaware, Eagle Ford, Woodford and others.

Production

With increased spending in the main plays, production is set to follow the same trend. The observed shift towards the Permian is worth keeping in mind, as it leads to a substantial increase in oil volumes in this region for 2018. Based on Rystad Energy’s analysis of 20 Permian-focused companies, we notice that these companies are guiding 15% growth in oil supply for 2018 compared to figures published in their fourth quarter 2017 results, and an increase of nearly 40% year-on-year. Assuming such a trajectory was representative for the entire Permian, it would translate to total oil growth of about 850,000 bbl/d from 4Q 2017 to 4Q 2018. 

Figure 3 shows guided growth among Permian oil producers for 2018 relative to actual oil production reported for 4Q 2017 in the area. Most Permian players are expecting double-digit growth in oil volumes in 2018, although a few are in fact anticipating a small decline versus 4Q 2017. Even for those companies, full-year 2018/2017 guided growth is positive. 

On the backdrop of an oil price that is stable in the $60 dollar range, companies are pushing ahead with their development plans and are streamlining their operations in order to ensure faster growth. As a result, the Permian is getting even busier. Rystad Energy closely follows how these companies are financing their plans and how their projected cash flows will keep up with these plans.