Capex decline in upstream sector since 2014
In the aftermath of the oil price (UCO) (USO) crash in 2014, and sustained lower energy prices, many upstream companies responded by lowering their capital expenses in 2015 and 2016. Instead, they focused on improving operational efficiency.
The graph above notes the percentage year-over-year capital reductions in 2016 by key upstream companies Apache (APA), Whiting Petroleum (WLL), Anadarko Petroleum (APC), Chesapeake Energy (CHK), Cabot Oil & Gas (COG), and Noble Energy (NBL).
Effect on capital spending in upstream companies
Investment has a higher correlation with energy prices for upstream companies than for downstream and midstream companies. Crude oil and natural gas prices determine a project’s future returns.
Effect of lower capital budget
Lower spending and investments in the upstream sector could result in a decline in production volumes for upstream companies in the absence of lower drilling activity, which could result in lower revenue and cash flow from operations.
Recovering energy prices in late 2016
Crude oil prices were on an uptrend after OPEC (Organization of Petroleum Exporting Countries) finally agreed to production cuts after some delay in late November 2016. Natural gas prices rose year-over-year, by ~70%. Crude oil prices rose ~40%.
Capital expenditure in 2017
Following a positive outlook for energy prices, many upstream companies have increased their capex guidance for 2017. According to a January report by Wood Mackenzie, “the investment cycle will show the first signs of growth in 2017 since 2014 and final investment decisions (FIDs) will double, compared with 2016.” The report also forecast that exploration and production spending will rise 3%. We’ll talk more about upstream spending in 2017 in the following part of this series.