Could Declining CAPEX Lead to Higher Oil Prices?
Oil exploration and production is capital-intensive by nature, and the ratio of capital expenditure (CAPEX) to cash flow has historically been greater than 100%. Recently, the EIA has seen a change in that pattern. The third quarter of 2021 (3Q21) showed financial results reporting more growth in cash from operations than in CAPEX, bringing that ratio to the lowest on record since 1995 at 41%.
EIA analyzed the financial results for 47 U.S. exploration and production (E&P) companies, and discovered limited CAPEX growth in 3Q21 despite reporting more cash from operations. Since the third quarter of 2020, oil prices have generally increased, reaching seven-year highs in November 2021. Over the previous four quarters, cash from operations has more than doubled for these companies, however, CAPEX increased by only 54%, significantly lower than the average from 2015-2019. These publicly traded E&P companies utilized this higher cash flow to repurchase more of their shares of stock, pay down debt, increase their cash balances on hand, and raise dividends.
These 47 publicly traded companies collectively produced 5.3 million barrels of crude oil and natural gas liquids (NGL) per day in 3Q21. This equates to an estimated 32% of all U.S. crude and NGL production for the quarter.
Significant economic disruption in 2020 led E&P companies to focus more on improving their short-term financial positions and less on long-term investments in CAPEX. In the third quarter of 2021 alone, these companies reduced their debt by $7.9 billion, more than any other quarter over the previous 10 years, and brought their long-term debt to the lowest level since 2012.
To help investors analyze company performance, public companies often publish their future plans for operations and spending in the form of company guidance. The EIA analyzed company guidance from 41 currently and 21 formerly operating E&P companies, and actual CAPEX in the previous four years exceeded annual spending by 9% on average. 2019 and 2020 showed a smaller deviation between company guidance and actual spending. This is likely a result of declining CAPEX budgets for those years. If the deviation for 2021 matches that of 2020, we believe the decreasing CAPEX by E&P companies will lead to less supply and higher prices.1
1 EIA. This Week in Petroleum, https://www.eia.gov/petroleum/weekly/archive/2021/211215/includes/analysis_print.php
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