Barclays: US Onshore Spending Expected to Rise This Year

Barclays: US Onshore Spending Expected to Rise This Year
Barclays anticipates an increase in onshore upstream spending.

Barclays’ updated survey of the top 40 U.S. onshore producers indicates preliminary upstream budgets are on track to increase by 9 percent in 2018. A healthy chunk of this investment is aimed at the Permian basin (19 percent), vs. relatively flat spending plans in other oil basins. Activity in the Permian has been buzzing for months, with several operators announcing plans for a more pronounced footprint there either through asset development or acquisitions

The spending increases assume the price of oil stays ~$50/bbl, which could leave some healthy wiggle room for additional spend if the West Texas Intermediate [WTI] price stays higher, according to the firm.

“WTI has been solidly above $60/bbl since January, yet several factors stand in the way of increased spending,” Barclays stated in an April 11 research note. “First, the potential for the recent ~$6 blowout in Permian differentials to linger into 2019 will weigh on E&Ps without committed takeaway capacity and/or differential hedges. Second, several E&Ps have announced buyback/dividend programs, though the market reaction has been mixed. Third, oilfield inflation will limit purchasing power…”

Given the turmoil the oil and gas markets have faced during the latest downturn, capital discipline remains essential. E&Ps have had to choose wisely when it comes to the right mix of cost savings, pursuing acquisitions and developing existing assets. In line with this, many of the 2018 onshore U.S. budgets revealed in March clearly reflect the delicate balance operators face in improving returns without sacrificing production growth, according to the firm.

“…Capital discipline is showing in large cap E&P spending at ~100 percent of their discretionary cash flow and small/mid-caps keeping to only ~105 percent, which is well below the five-year average of ~118 percent and 155 percent, respectively. E&Ps have a long history of out-spending, but a behavioral shift may be in store since investor demands for higher returns really hit a fever pitch last September.”

As for the oilfield services side of the equation, “between severe weather, frac sand rail disruptions, and new frac capacity additions, the first quarter of 2018 is setting up to be quite messy for U.S. onshore services” but activity should start to normalize in the second quarter of 2018, Barclays said.

Back in December, the firm’s 2018 E&P Spending Survey showed global upstream spending was expected to grow 8 percent this year, up slightly from a 4 percent increase in 2017. Looking at regions, international spending was set to increase 4 percent, whereas North America accounted for the bulk of the projected growth with an increase of 21 percent.

Since only 10 companies had announced a 2018 budget for North American spending at the time of the December survey, the firm relied on estimates of reinvestment rates on discretionary cash flow at WTI strip oil prices ($55 WTI in December vs. $62 WTI currently).


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