Experience RS

The Oil Price Winter Is Gone, but Operators Continue to Protect the (Cash Flow) Castle

E&P earnings during Q1 appear more positive compared with last quarter as companies generally adhere to announced plans of spending within cash flow, reducing G&A and optimizing well performance through spacing.

Looking at capex and production guidance for 80 companies, and based on producers with published guidance to date, 2019 capital spending is set to drop an average 6.4% while production is expected to increase 6.1%. Larger producers, those with annual budgets exceeding $1 billion, forecast decreasing capital spending 4.5% in 2019 while production is predicted to rise 6.0%. Smaller producers, those spending less than $1 billion, expect to cut capex by 15.9% and boost production by 6.6%. 

Even the majors and supermajors, which have been able to invest counter-cyclically in recent years, are keeping capex guidance to a small increase outside of XOM, which was admonished by shareholders. The large-cap companies have been stock outperformers relative to the benchmark energy index in recent history (Figure 1), but are they the forerunners of a changing outlook and investor sentiment for others?

Warren Buffett’s support for the OXY/APC deal, albeit not cheap for OXY, could be calling the figurative bottom of the long-only investment cycle. The offshore sector is gaining momentum, demonstrated by increased tendering by operators as they capitalize on their high-graded assets, and LNG markets helped to keep investment flowing to some degree.

If the tide is turning, which is no sure thing, investors could bet on take-private bids, mineral rights owners and, of course, Permian pure-play producers.

FIGURE 1 |  Large-Cap Producers Recently Outperformed Benchmark Index

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