As market dynamics continue to push oil prices along the rollercoaster of volatility, global E&P spending could rise 8% this year to an estimated $414.5 billion, according to a report released this week by Barclays.
But more spending likely won’t be seen everywhere, and growth in some regions won’t be as robust as in the past.
“The growth mix is poised to reverse in 2019 as North America slows [+9% vs. +18% in 2018], while international markets accelerate [+8% vs. 4% in 2018],” Barclays said in the report. Analysts added that North America “spending is exposed to more downside risk given the recent oil price collapse,” which is not fully reflected in budgets.
Oil prices collapsed toward year-end 2018. A barrel of West Texas Intermediate (WTI) crude plummeted to less than $47 by the last week of December, down from more than $75 in June 2018. It was trading for about $51 per barrel early Jan. 9.
Still, spending is forecast to rise in North America, where lush U.S. shale plays sent oil production to record highs. But the year is expected to bring double-digit spending growth in some international regions such as Latin America and Africa.
The report, released Jan. 8, was based on a survey conducted of more than 200 oil and gas companies worldwide from Nov. 19 to Dec. 28. Information from other sources such as press releases, presentations, public commentary and discussion with corporate executives on planned upstream spending was also used.
It remains to be seen how much companies plan to spend, as many North American E&Ps—and others—have not unveiled their 2019 budgets. More news is expected in February.
IOCs Take Permian Spotlight
Barclays forecasts E&P spending in North America to be just over an estimated $128 billion, up 9%. The spending growth is down from the more than 18% seen in 2018, according to the report.
“Commentary and guidance all point to further spending restraint by large E&Ps in 2019…if anything the recent pullback in WTI further validated this newfound capital discipline,” Barclays said.
Large U.S. E&Ps—which include EOG Resources Inc. (NYSE: EOG), Occidental Petroleum Corp. (NYSE: OXY) and Anadarko Petroleum Corp. (NYSE: APC)—are forecast to increase E&P budgets by 5% to about $38.8 billion, according to the report. Spending is expected to stay within cash flow for a second straight year as E&Ps maintain fiscal discipline—in line with investors’ demands.
International oil companies (IOC) will be the biggest spenders in North America—doling out about $45.5 billion, according to Barclays. Analysts anticipate 2019 will be the year of IOC expansion in the Permian Basin.
“E&Ps get all the headlines, but IOCs have been building out supply chain and infrastructure to support large, multi-well pad developments in the Permian,” the report said. “IOCs plan to increase [North American] spending 15% this year, with limited commodity price sensitivity.”
Signs are already evident.
Chevron Corp. (NYSE: CVX) said in December its upstream budget includes $3.6 billion for the Permian and $1.6 billion for other shale and tight investments. Barclays pointed out that Chevron is already trending a full year of guidance provided in March 2018, which called for 500,000 barrels of oil equivalent per day (boe/d) by year-end 2020. The company’s Permian production jumped more than 80% to 338,000 boe/d in third-quarter 2018, compared to a year earlier.
Of the eight IOCs highlighted in the Barclays report, Chevron has the highest estimated E&P capex in North America, followed by Royal Dutch Shell (NYSE: RDS.A), Exxon Mobil Corp. (NYSE: XOM) and BP Plc (NYSE: BP), which completed its $10.5 billion purchase of BHP Billiton’s U.S. onshore assets in October.
Analysts expect more spending from smaller E&Ps—a group that includes Parsley Energy Inc. (NYSE: PE), Antero Resources Corp. (NYSE: AR) and Cimarex Energy Co. (NYSE: XEC)—in 2019, too. Barclays forecast U.S. small and mid E&Ps to spend about $21.9 billion, an 11% increase. This is up from an 8% spending growth in 2018. Such companies are expected to spend 120% of discretionary cash flow in 2019, despite “the capital discipline mantra heard across the industry” due to needs to keep drilling HBP acreage to hold assets, create a mature production base and shift to development among other reasons, Barclays said.
Barclays said it expects spending growth of at least 8% from almost every region, with the exception being Russia/FSU. International spending is forecast to reach $286 billion in 2019.
The Middle East is expected to lead international spending, up 8% to about $43 billion. Spending grew only 2% in 2018, the report said.
“We expect most of the Middle East NOCs [national oil companies] to increase spend ~5-10% in 2019 as activity continues to ramp up despite the recent oil price decline and Dec. 6 decision to reduce production by 1.2 MMbbl/d,” Barclays said in the report.
At about $18.4 billion, most of the estimated spend will come from Saudi Aramco, which awarded several notable oilfield services contracts in 2018 for onshore and offshore rigs and unconventional gas stimulation services, according to the report. The amount is more than twice that of the second highest spender Abu Dhabi National Oil Co.
Latin America is expected to see spending growth of 11%, rising to an estimated $34 billion. This is up from a decline of 6% in 2018, the report showed.
Brazil’s Petrobras and Mexico’s Pemex are the top Latin American spenders at $13.2 billion (+19%) and $10.5 billion (+15%), respectively.
For Petrobras, “approximately 56% of E&P capital is expected to go toward presalt while the balance will go to post-salt,” the report said. “70% of [its] E&P spending is expected to be for ‘production development,’ with the remaining 30% for exploration, infrastructure [and] R&D.”
Barclays said a $4 billion jump in forecasted exploration investment drove Petrobras’ capex increase.
Goals set by Mexican President Andrés Manuel Lopez Obrador to increase production to 2.624 million barrels per day by year-end 2024 are partly behind state-run Pemex’s spending increase.
“The government plans on signing two contracts, one for offshore production infrastructure on Jan. 15 and the other for a ‘massive drilling push’ on Jan. 30,” Barclays said. “The project would cover the drilling of 73 offshore wells and 44 onshore wells.”
Like Latin America, double-digit spending growth is also on the horizon for Africa. The report shows 12% spending growth for 2019 to about $18 billion, compared to 1% spending growth in 2018. Here, Barclays said growth is driven by Algeria’s Sonatrach, the Nigerian National Petroleum Corp. and Angola’s Sonangol along with Tullow Oil and Kosmos Energy Ltd. (NYSE: KOS).
Barclays also reported that international upstream spending by NOCs and European IOCs are both expected to rise by 8%. Spending growth from the European IOCs come after international upstream spending fell by 4% in 2018.
“IOCs generally try to keep one eye on longer-term fundamentals and another on replacing production, but only after shoring up balance sheets and ensuring they can maintain dividends,” the report said. “Most have shored up balance sheets and protected the dividend especially after generating significant cash flow in 2018 and have shown an increased willingness to spend, albeit modestly.”
Velda Addison can be reached at email@example.com.