Report: E&P firms pull back on capex growth plans

Roughly one in three exploration and production executives surveyed by the Federal Reserve Bank of Dallas say they intend to grow their capital expenditures in 2024, a drop from 3 months ago spurred by spikes in uncertainty and caution.

The latest Dallas Fed Energy Survey also shows that a number of producers in Texas (as well as parts of New Mexico and Louisiana) already have pulled from production growth goals: In addition to showing a drop in 2024 capex plans—in September, half of all respondents said they intended to spend more next year; that number now stands at 30.5%—the Fed’s report also shows that the number of exploration and produciton (E&P) companies now spending more than in recent quarters fell to about 25% from 48% in this year's third quarter (OGJ Online, Sept. 27, 2023).

“Uncertainty remains the largest obstacle to mid-term and longer-term industry investment,” one service firm executive told Fed researchers. “Though production remains resilient, with seemingly lower investment per barrel of oil equivalent produced, the reality might be obscured by the lower cost of working through drilled but uncompleted well inventory and new production from large projects sanctioned pre-COVID.”

The pullback in optimism and spending plans likely also reflects the headline price of oil. Three months ago, a majority of respondents to the Dallas Fed’s survey expected a barrel of West Texas Intermediate would sell for $85-95 at end-2023. But WTI has lately traded in the low- to mid-$70s and nearly half of those answering the Fed’s questions early this month think its price won’t reach $80/bbl again this year.

While the Fed survey’s outlook component fell back into negative territory after soaring in the third quarter, the fact that almost a third of the nearly 100 E&P firms questioned plan to raise capex suggests that US production is likely to build on a 2023 during which, according to S&P Global Commodity Insights, the country produced more oil than any nation in history. (OGJ Online, Dec. 19, 2023). Among large E&P firms, 35% plan to increase production next year while 47% of smaller companies are planning for growth.

In fact, growing production is the top priority for 41% of small-firm executives—a stark contrast from the 5% of large-company leaders naming that as their No. 1 goal for 2024. The top goals among the latter cohort: Acquire assets (35%) and reduce debt (20%).

One executive answering the survey took aim at the strategies of large companies in the sector, specifically those who have made headlines of late with multibillion-dollar acquisition announcements.

“Majors are explicitly investing on the thesis that the back end of the forward curve for oil is just plain wrong. Whatever Excel model they are using to justify these prices isn't going to align with their consolidate-and-cut operations,” the exec told Fed researchers. “Inventory for US onshore will be extremely valuable in 5 years as shale inches toward death and moves to terminal decline. Prices are likely closer to $150 than $50 at the end of the decade.”