During the quarter ending September 30, 2018, US shale operators demonstrated strong improvements in production, growing about ~8% on average. According to our analysis of 34 onshore producers in the US, a number of industry players boasted exceptional execution driven by improved well performance and development activity. Despite widening WTI differentials that largely affected the oil price realizations of most Permian active companies, the majority of these players remain well positioned to meet their production targets for the year.

Some have even communicated plans to produce more than previously guided as well as moderately increase capital investments while maintaining focus on cost efficient operations. However, some producers are falling behind on their original oil targets, which has led to downward revisions in forecasts during the quarter. Mostly, these are also the companies that exhibited the largest WTI oil price differentials during 3Q 2018. Several of them also need to generate a strong increase in oil production during 4Q 2018 to be able to meet their revised production targets.

Production guidance revisions

3Q 2018 earnings results released last week by the majority of US shale operators revealed strong production additions over the period with average oil growth standing at ~8% among the selection of 34 US onshore operators analyzed. A number of producers experienced further improvements in well productivity and efficiency of operations.

As a result, these companies delivered oil production at the top end and above the guided volumes for the quarter. Pioneer Natural Resources increased oil output by 6% during 3Q 2018 producing above the range guided. Similarly, EOG Resources set a company record and exceeded the high end of its target range, delivering a compelling combination of production growth, high returns and free cash flow. Newfield Exploration realized stronger than expected production attributable to the Anadarko Basin, while Continental Resources praised the performance and returns achieved in the Bakken play.

Underpinned by strong overall results obtained in the year so far, the majority of analyzed operators kept their full year 2018 oil production guidance unchanged and are well positioned to meet the individual targets. However, we have also identified a number of players, which guided higher mid-point oil production forecasts than communicated last quarter. At the same time, reporting of some other producers suggested lower oil production than previously expected.

Figure 1 displays changes in full year 2018 oil production guidance communicated during the recent quarter by companies that indicated higher or lower expected volumes for the year, compared to the information provided last quarter. During 3Q 2018, Oxy delivered outstanding production results due to improved well performance in primary development areas, and its guided mid-point 4Q oil production target implies about 1% higher total oil volumes compared to the mid-point guidance provided last quarter. QEP Resources increased 2018 oil production guidance by 2.1% reflecting improved efficiencies in the Permian Basin and better than forecasted results in the Williston Basin. Based on current levels of efficiencies and non-operated activity, Callon Petroleum increased its mid-point oil production by 6.3%.

On the other hand, some players signaled lower oil output than expected earlier. Cimarex Energy lowered the mid-point oil estimate for 4Q, resulting in 1% lower oil volumes for the full year amid slightly increased total production guidance. PDC Energy expects full year total production at the low end of its guidance range and estimates lower oil content than previously assumed. Production in the Wattenberg area continues to be affected by curtailments, driven by the shortfall in midstream capacity in the basin. Therefore, the company anticipates full year oil production 5% lower than guided earlier.

Halcon Resources experienced third-party gas infrastructure constraints that led to 4% lower oil guidance for the year. Resolute Energy estimated the highest decrease in oil production volumes versus previous guidance. The company’s overall product mix shifted to 45% oil compared to the 52% assumed previously, reflective of delays in initial production from some of its wells over the first half of 2018.

What to expect from production in 4Q18?

Given actual performance to date and changes in the production forecasts provided, selected shale operators need to increase production by ~5.5% on average during Q4 2018 to achieve full year mid-point oil guidance estimates. However, the production targets vary considerably by company.

Figure 2 depicts Q4 2018 oil production increase required to meet the most recent oil production guidance for a selection of analyzed operators. While producers like SM Energy, EP Energy and Laredo Petroleum can decrease oil output this quarter and still match 2018 oil production guidance, a number of Permian players primarily need to generate double-digit production growth. For instance, Centennial Resource Development has to increase oil output by 20% in the final quarter, reaching an oil production rate of over 43,000 bpd. Cimarex Energy guided 18% oil production growth in Q4, assuming a mid-point of the range. Producing at the lower end of guidance for the quarter will result in a lower level of total oil production compared to the mid-point of the range currently expected.

As mentioned earlier, PDC Energy continues to face issues in Wattenberg operating performance, which could pose difficulties in attaining 16% oil production growth implied by full year oil guidance. Furthermore, producing at an oil rate well below Q4 2017 during the first half of 2018, Resolute Energy showed impressive oil growth in 3Q 2018 and added 10% to the Q4 2017 level. The company is set for a stronger finish this year, but needs to generate 17% oil growth to meet the mid-range of its oil production target.

Chevron leads the growth in the Permian

Despite ongoing capacity constraints and expanding Midland-Cushing differentials, Permian producers demonstrated excellent performance in the play so far in 2018. Supported by significant improvements in well performance and efficiencies, a number of Permian players generated outstanding oil production growth since the end of 2017.

Figure 3 ranks top ten operators active in the Permian Basin by attained oil production growth in Q3 2018 versus Q4 2017. Pure-play Parsley Energy outperforms other well-established Permian operators with impressive 41% growth, driven by efficient development operations and strong well results. At the same time, Chevron managed to increase its output in the Permian by an outstanding 69% since Q4 2017, adding nearly 150,000 boepd of total production. Since the beginning of the year, the company performs strongly above its original guidance for the play, demonstrating focus on expanding the span of its operations in the most prolific unconventional US basin. Overall, nearly all included producers showed double-digit oil production growth since Q4 2017 for companywide operations.

More capital is to be invested

Having increased capital budgets by 8% on average during 2Q 2018, the majority of analyzed shale operators maintained their full year capital expenditure guidance during 3Q 2018 and highlighted focus on cost discipline, investments within cash flows and shareholder return prioritization. These strategies are expected to remain the focus of 2019 operations as well. Nevertheless, we have also seen several producers raising the mid-point of planned investment targets further.

Figure 4 shows capex revisions that were implemented in 2Q and 3Q 2018 by company type. During the last quarter, capex guidance increased by an additional $1.4 billion, following the increase of $3.7 billion in the previous quarter. Companies active in the Permian contributed to over 70% of the total adjustment.

Among these, Concho Resources added $500 million, related to the spending pertaining to RSP Permian properties. Apache increased its capital allocation on US operations by $200 million, and QEP Resources increased its capex estimate by $115 million, reflecting additional wells in the Permian and refrac activity in the Williston Basin. Diamondback Energy budgeted an additional $88 million for infrastructure costs, Matador Resources added spending on Eagle Ford wells, and Callon Petroleum estimated to spend at a higher range of previous guidance, $20 million above the mid-point. Among multi-play companies, EOG Resources raised capital expenditures by $300 million, attributed to higher service cost than originally budgeted.

In light of ongoing takeaway constraints plaguing Permian Basin producers, 3Q 2018 results highlighted the dramatic impact of capacity issues on oil price realizations. During the quarter, Permian producers realized an average WTI oil differential of around $11 per barrel. In comparison, the average during 2Q stood at $6 per barrel, and just at about $2 per barrel during 1Q 2018.

Firm transportation commitments?

Figure 5 demonstrates how WTI differentials realized by our selection of US operators changed over the course of the year. EOG, Marathon and Anadarko remain among the top performers with the highest realized oil prices, reflective of successful marketing strategies adapted by these producers. In fact, Marathon Oil was able to slightly improve its differential during 3Q compared to 2Q 2018. The company made important midstream advancements in Delaware to protect flow assurance and improve price realizations. Its Eagle Ford production also has strong LLS-based pricing.

Similarly, Chevron saw its differential improving during 3Q compared to the previous quarter, as it added Permian crude oil takeaway capacity in June. Newfield Exploration has also exhibited a lowered differential this quarter, which was attributable to higher production from STACK assets that have 100% WTI NYMEX pricing. Regarding Permian-focused operators, WPX Energy remains among the top performing companies with no further degradation in its realized differential during 3Q 2018. The company’s Permian volumes are mostly priced at Gulf Coast.

A majority of other Permian producers exhibited a significant widening in realized oil price differentials. Even though Pioneer mentioned that its marketing efforts yielded premium Brent related oil pricing during the quarter, its differential still averaged $12 per barrel, nearly doubling relative to the previous quarter. Cimarex Energy had an average differential for companywide activities of $11.35 per barrel, but its Permian volumes that are mostly Midland priced averaged $14.34 per barrel. Smaller Permian producers like Halcon, Centennial and Resolute Energy experienced the highest oil price differentials over the quarter. These companies are also among those, which lowered oil production guidance for the year or require significant production growth in the final quarter to meet their oil production targets.