A new report from the government suggests drilling activity is likely to declilne in the coming months of 2023 as reflected by declining rig counts.
The following is the report from the U.S. Energy Information Administration:
Financial results for 40 publicly traded exploration and production (E&P) companies show capital expenditures in the first quarter of 2023 (1Q23) were within 10% of the 2019 average as increasing crude oil prices in the first half of 2022 spurred increased production. However, generally declining rig counts since the start of 2023 suggest development activity could decline over the next two quarters.
With cash from operations declining by one-third in 1Q23 from last year’s high in 3Q22, the companies chose to direct revenues toward shareholder returns while forgoing debt reduction and asset purchases. Other trends from the 1Q23 financial results point to production costs continuing to decline but remaining high compared with pre-pandemic levels.
We base our analysis on the published financial reports of 40 publicly traded oil companies that produce most of their crude oil in the United States. As a result, our observations do not represent the entire sector because we exclude private companies, which do not publish financial reports. These 40 publicly traded companies collectively produced 32% of all crude oil produced in the United States in 1Q23, or about 4.0 million barrels per day (b/d).
The West Texas Intermediate (WTI) crude oil price averaged $75.96 per barrel (b) in 1Q23, a 20% ($19.21/b) decrease compared with 1Q22 and an 8% ($6.72/b) decrease compared with 4Q22. Lower crude oil prices contributed to cash from operations decreasing 18% ($5.8 billion) from 4Q22 to $26.2 billion in 1Q23 (Figure 1). However, higher production resulted in cash from operations increasing 13% ($3.0 billion) compared with 1Q22. Capital expenditure in 1Q23 increased 26% ($3.5 billion) compared with 1Q22 to $16.7 billion and increased 12% ($1.8 billion) compared with 4Q22. Higher capital expenditure supported production increasing 9% (338,000 b/d) in 1Q23 from 1Q22 and 1% (59,000 b/d) from 4Q22.
In 1Q23, these E&P companies allocated their cash toward capital expenditure and shareholder returns. Capital expenditures as a share of cash from operations increased to 64%, the highest percentage since the beginning of the pandemic. This share remains below the quarterly average of 104% in the period before the pandemic (2018–19). Historically, the ratio of capital expenditure to cash from operations has been greater than 100%, reflecting the capital-intensive nature of E&P as well as the need for outside sources of capital to fund drilling projects. Shareholder returns, in the form of share repurchases and dividends, accounted for the remainder of the uses of cash in the quarter. Debt reduction, which the E&P companies allocated $39.7 billion toward between 4Q20 and 3Q22, has not been a large use of cash for the last two quarters (Figure 2). With long-term debt now 30% below the 2018–19 average, recent increases in net debt suggest the public E&P companies have ended their focus on debt reduction.
Shareholder distributions decreased 32% from 4Q22 to $11.8 billion in 1Q23 but remain elevated as a share of cash from operations (Figure 3). Net share repurchases decreased 45% from 4Q22 to $5.5 billion, and dividends decreased 16% to $6.3 billion. However, taking out the one-time $4.3 billion acquisition of common stock by Continental Resources, Inc., in 4Q22 shows net share repurchases otherwise declined by only 3% in 1Q23 compared with the previous quarter. Shareholder distributions as a percentage of cash from operations were 45% in 1Q23. This value remains above the 2018–19 average of 24%, showing the E&P companies continue to direct cash to shareholders. Recent share repurchases as well as mergers and acquisitions over the last five years have reduced shares outstanding for these companies by 22% compared with the 2018–19 average. Recent increases in dividends combined with fewer shares outstanding increased the average dividend per share for these companies to $0.68 per share in 1Q23, almost five times the 2018–19 average of $0.14 per share.
Production costs continued to decrease from last year’s high in 2Q22, but labor remains a cost pressure for E&P companies, according to industry surveys. Production expenses, reflecting the cost of goods sold, operating expenses, and production taxes, declined 14% from 4Q22 to $27.19 per barrel of oil equivalent (BOE) in 1Q23 (Figure 4). Compared with 2Q22, production expenses have decreased 28%. Cost of goods sold, which includes the cost of materials and labor directly used in production, has been the main driver of production cost increases because of supply chain constraints in 2022. Although the cost of goods sold has declined by 39% from 2Q22 to $13.80/BOE in 1Q23, it remains 62% ($5.26/BOE) above the 2018–19 average of $8.54/BOE. Responses to the Dallas Fed Energy Survey suggest cost increases for producers in the Permian Basin have slowed for input costs, lease operating expenses, finding and development costs, and wages and benefits so far in 2023. Among those, more respondents saw wages and benefits as a larger cost pressure than other production costs.
Recent crude oil prices and rig counts suggest that capital expenditure could decline in the coming quarters. Crude oil prices and production have a positive relationship: increases in prices stimulate production and decreases in prices reduce production. Price movements typically lead changes in production by four to six months. Since the beginning of the pandemic, the number of oil-directed drilling rigs in operation increased as crude oil prices increased. WTI crude oil prices peaked at $114.84/b on average in June 2022 before declining to average $75.96/b in 1Q23 and $73.49/b in 2Q23 (Figure 5). The oil-directed rig count peaked at 627 rigs at the beginning of December 2022 and has since declined by 15% (97 rigs) through the third week of July 2023. According to our latest Short-Term Energy Outlook, total U.S. crude oil production declined 0.5% (61,000 b/d) quarter-over-quarter in 2Q23 and is forecast to decline another 0.6% (72,000 b/d) in 3Q23.
