Well, I’ll say this for Wells Fargo (whose research I maligned on Thursday prompting an amusing response from the bank’s help desk): they are dead on when it comes to explaining how US operators didn’t seem to learn jack sh*t from the downturn in crude prices.
Here’s what the bank said in a great note out last month:
Street Missing The History Lesson. With the activity ramp fully underway and the attention now on volumes growth, we wanted to revisit the topic of E&P outspend. We Model Outspend Much Greater Than Consensus. Operators seem to have short memories when it comes to capital discipline which is why it’s no surprise to us that we’re already starting to see signs of a meaningful ramp in spending emerge. Of the 17 companies that have provided capital guidance on 2017 thus far, all but one have announced an increase in spending, with the average budget up 42% from 2016E. And we believe that this number will grow, as our forecast contemplates 55% year over year growth in capex. Consequently, our view on outspend is meaningfully disconnected from Street, as we model capital spending at 116% of cash flows in 2017E and 112% of cash flows in 2018E. The exhibit below highlights historical and forecasted outspend, and what can observed is that, while our numbers are well above Street expectations, they still fall well short of the historical average outspend. So we believe that if anything, even our more punitive estimates for 2017 and 2018 capex may be light compared to what plays out.
Poor capital discipline has consequences as enterprise values are expanded through either net debt or equity increases. In all cases, existing common stockholders’ share of total EV is diluted, all else equal. Therefore, production and cash flow forecasts are less impactful than headline figures suggest after making an adjustment for associated dilution.
Right. This entire model is a deflationary charade that revolves (quite literally when you count revolvers as a means of plugging funding gaps) around easy access to capital to fund outspend. More than a few of these companies aren’t really viable and when the going gets tough, they’ve got three options as delineated last year by Ali al-Naimi:
Lower costs, borrow cash or liquidate.
Assuming US shale has reached a near-term limit in terms of exploring option number one, and assuming option number two is only viable until capital markets get sick of funding this farce, then option three is probably where this is headed. And ironically, the more US operators produce, the quicker they’ll get there.
That assessment was underscored “bigly” this week as crude plunged to pre-OPEC-cut levels. But if we learned anything from January’s string of equity offerings…
… it’s that capital markets haven’t slammed shut quite yet, although I’d imagine that this week’s price action might be making some folks think twice about all those shares they bought in January.
Folks like the gullible idiots who didn’t realize that an IPO from a company with the ticker “FRAC” probably signaled that the market had gone full retard…
But you know, f*ck it, right? Let’s just keep acting like the writing isn’t on the wall.
Right, Citi? ….
Speaking of Goldman, the bank that said yesterday it’s best to “shake off” crude’s collapse (only to watch as crude collapsed-er-er on Friday) is out with a new note entitled “What Oil CEOs Are Saying: Confidence Is Back.” Below, find excerpts and do try not to laugh too hard as you compare and contrast with this:
85% of global upstream companies are increasing capex in 2017. There is one clear message from the 1000+ pages of 4Q transcripts: that most CEOs believe that the worst is over, and the time for growth is now. We expect c.85% of global upstream companies under our coverage to increase capex in 2017 vs. 2016, spending c.$30 bn (10%) more on aggregate year on year. While the most dramatic ramp in capex is in the US, spend is recovering in most places, with companies accelerating activity in shale and brownfield and even planning to selectively sanction projects in LNG, offshore and Canadian oil sands.
Industry oil price expectations are above the forward curve. The industry appears to be using a wide spread of oil price assumptions in its strategy presentations, despite an almost completely flat forward curve at c.$52/bl. European integrateds assume an average of $60/bl, with an upper range of $80/bl, the US E&Ps assume $55/bl, while OPEC and Russia assume an average of $46/bl in their fiscal budgets.
Service costs rising in the US, but few signs of bottlenecks so far. While the rapid doubling of the rig count is clearly driving some areas of inflation in the US, with sand prices up >100% to make new highs and pressure pumping up 20%-30% from the lows, there are few signs of overheating.
Ex-shale, deflation, declines and delivery all continue to surprise Productivity and efficiency improvements are driving sustainable cost reductions outside of shale, technology/big data is increasingly being used to improve uptime on existing platforms, reducing decline rates by 200- 300bp vs. history, while 2016 was the best year of delivery of Top Projects volumes on record, with only 1% slippage vs. our 3.5% risking. While OPEC cuts, it is planning for growth.
We have reviewed over 1,000 pages of 4Q transcripts from global energy companies (sourced from Bloomberg). The clear message from CEOs: The worst is behind us, and now is the time to think about growth. While some management teams expressed more caution than others, the industry as a whole is retooling: We estimate that c.85% of global upstream companies covered by GS will increase capex in 2017 vs. 2016, spending $30 bn more (+10%) in aggregate. While the most dramatic ramp in capex is in the US, spend is recovering everywhere, with companies accelerating activity in shale and brownfield and even planning to selectively sanction projects in LNG, offshore and Canadian oil sands.