Despite rising production and commodity prices, investing at North American oil fields has turned sluggish.
This year marked only the third time in more than a decade that North American producers budgeted less than their cash flow forecasts allowed, reversing a trend that buoys sales in the U.S. oil field services sector and job creation in energy hubs, including Houston.
At first glance, it’s strange: No unexpected surge in prices pushed up cash flows, as in 2005, and no dead stop in the credit markets hit spending, as in 2008.
Oil and gas remains a robust industry chasing the fruits of triple-digit oil prices.
But the spending downturn of 2013 had several catalysts — last year’s lower expectations for commodity prices, increased shareholder pressure for financial discipline and the retrenching of Chesapeake Energy, which was the largest driller in the nation two years ago.
A further roadblock is the lack of viable energy transportation infrastructure between new shale plays and U.S. markets.
“Why go out and drill when you don’t have the pipeline to get it out?” said Marshall Adkins, an analyst at Houston investment banking firm Raymond James.
After double-digit growth in two of the past three years, U.S. producers are projected to invest just 3.4 percent more than last year, according to a survey of 300 companies by Barclays.
Producers late last year made conservative budget forecasts, predicting prices of $85 per barrel for U.S. benchmark West Texas Intermediate crude and $3.47 per million British thermal units for Henry Hub natural gas. Prices have risen higher than that this year — ending last week at $102.87 for oil and $$3.59 for gas.
Meanwhile, investment continues in the Eastern Hemisphere. Producers have sent a ton of money to the Middle East and the Asia-Pacific regions, as Saudi Arabia and other big producers reassert their dominance and China’s appetite for hydrocarbons keeps growing.
Offshore money pits
Capital-intensive offshore projects also continue to pop up in those regions, and costs quickly can overrun expectations.
“That’s the emerging frontier of available production growth,” Adkins said.
The global exploration and production industry hit a record $678 billion in capital expenditure projections this year, a 10 percent rise over 2012.
Spending by the integrated and independent producers has grown 28 percent in the Middle East and 19 percent in the Asia-Pacific regions, compared to 2 percent growth in North American investment over last year, according to Barclays.
Increased efficiencies at the wellhead have driven some of the North American investment slowdown, as companies boost production with fewer rigs and more wells. Rig count in the U.S. has fallen 5.27 percent this year, while oil and gas production in the U.S. climbed 15 percent, thanks to booming production in various shale plays, according to data compiled by Bloomberg.
“A lot of the companies are able to do more with less,” said Allen Good, an analyst with Morningstar.
Chesapeake Energy this year cut its spending nearly in half to $7.2 billion, a sharp change as new management looked to put some financial discipline into what was once one of the most aggressive U.S. energy companies. The Oklahoma City-based natural gas company chopped its rig count in half from two years ago, and that decline makes up half of the country’s drop in active rigs, according to Raymond James.
The composition of producers’ capital expenditures is changing as well, as U.S. companies shift their focus to drilling and extraction and away from land acquisitions, aiming to monetize the investments they made during the massive, shale-driven land grab in recent years.
Spending on North American land acquisitions fell 62 percent from 2010 to 2012, while development expenditures jumped 46 percent to $357 billion over the same two years, according to Bloomberg.
Money in divesting
And some companies are thriving by divesting, said Doug Meier, a partner at PricewaterhouseCoopers in Houston.
“Companies are reevaluating their portfolios and saying, ‘OK, where do we expect the highest returns and how do we invest in that?’” Meier said.
Companies that are heavily leveraged are financing the debt by divesting, and reinvesting the proceeds into higher-returning assets.
But the overall investment decline in North America means less cash for oil field service companies that operate only in the U.S., said James West, an analyst at Barclays.
Internationally, oil services behemoths have become increasingly aggressive while commodity prices remain high, and Iraq became a market for the first time this year. That puts the biggest oil field services giants — Halliburton, Schlumberger, Baker Hughes and Weatherford — in a good position to grab rising profits in the international field, West said.
Across the globe, sales for oil field service companies are still growing, although the industry average has declined from 18 percent sales growth in last year’s second quarter to 11 percent in the second quarter of 2013, according to Bloomberg.
At the height of the credit crunch in 2009, oil industry spending in the U.S. plummeted 32 percent. Much of the investment surge in the next two years was driven by companies “getting back to business,” and the production boom at shale plays, West said.
Then early in 2012, cash flows and spending budgets took a hit when the price of natural gas collapsed below $2 before beginning a slow recovery.
Despite the investment slowdown this year, 2014 probably will see North American exploration and production companies march back with more money, Adkins of Raymond James said.
That’s what happened after 2005 and 2008, the two other years in past decade when the sector under-spent its cash flow, he said.
North American independent producers are projected to spend $132 billion next year, up 3.6 percent from this year’s forecast, according to Bloomberg.
And Adkins said this year’s slowdown in North American investment is hardly alarming, given the return of manufacturing, the balance of trade and the job creation stemming from the energy industry.
“It’s one of the most bullish things in the U.S. economy,” Adkins said. “Cheap energy is giving us a huge advantage.”