Recently released fourth quarter 2018 earnings results and updated 2019 guidance have confirmed our expectations that most US shale operators aim to moderate drilling and completion activity this year, prioritizing cost discipline over aggressive growth. Setting budgets under an assumption of $50 to $55 WTI oil price, numerous producers have reported plans to cut spending levels substantially. Despite this, US shale operators on average remain optimistic on oil production growth throughout 2019. Underpinned by well performance improvements achieved over the last year, US shale operators guide for a 16% increase in oil production growth in 2019 over 2018.
It is important to bear in mind that production expanded dramatically throughout the second half of 2018. On average, the end-2018 production rate for US onshore-focused companies was significantly higher than the average for the whole year. Therefore, planned full-year 2019 production is expected to grow by 6% over the 4Q 2018 level, and growth between 4Q 2018 and 4Q 2019 is seen at 11%, which is still enough to generate a 1 million barrel per day (bpd) of increased oil production between 4Q 2018 and 4Q 2019.
In order to evaluate the performance and direction US shale companies are pursuing in 2019, Rystad Energy has analyzed 4Q 2018 reporting and 2019 guidance of around 50 US operators. The shift in investor sentiment pushing for the focus on cash flow generation and value maximization, something which became apparent especially during the second half of 2018, has led to a change in strategy among E&P players. The most recent guiding on 2019 capital budgets indicated that, on average, US operators expect a 6% decrease in capex in 2019 versus 2018.
Figure 1 depicts the change in capital budgets for 2019 versus 2018 by company type. For this purpose, all analyzed operators were grouped according to the main producing shale play, defined as the play that accounts for more than 50% of the company’s total US production. The results showed that the operators focused in the Permian Basin plan the largest absolute decrease in capital expenditures, cutting cost by $2.6 billion. Producers like Laredo Petroleum, QEP Resources and Rosehill Resources plan to decrease investments by more than 40% this year. Some of these also highlighted the initiatives to review strategic alternatives to maximize shareholder value, which could result in mergers or a sale of the company. The largest Permian E&P players – including Diamondback, Pioneer, and Oxy – guide for spending reductions lower than 10%. All of these companies still expect to spend within cash flow this year. On average, the estimated capital budget reduction in the Permian segment has accounted for about 13% relative to 2018.
Companies active in multiple shale basins, as well as Appalachia-focused players, are set to decrease investments this year by $1.8 billion and $1.6 billion, respectively. For multi-play companies, this represents a reduction of 8% relative to last year. Among these, Noble Energy and Apache project cutting more than 20% in investments, and plan to direct capital primarily to the most profitable areas. On the other hand, a reduction for Marcellus/Utica producers constitutes a 19% cut in spending, with companies like EQT, CNX, and Gulfport guiding for decreases of 20% to 30% versus 2018.
The largest percentage decrease is expected for the Eagle Ford segment, where spending is to fall 29%. Sanchez Energy leads the way, having revealed plans to cut investments by 80% this year, and highlighting that this prudent step is needed to preserve capital and maximize liquidity position. Selected Bakken companies report a decrease of about 5% in planned spending, while Niobrara producers guide a reduction of 22%. Finally, Alta Mesa Resources, a STACK player represented by “Other” company type, plans to decrease capex in 2019 by 73% compared to last year.
In contrast to a majority of E&P players, majors guide a 9% increase in capital for their US operations, which corresponds to an addition of about $2.4 billion. Chevron, ExxonMobil and Shell are planning to increase investments in the US onshore segment, largely directed at the prolific Permian Basin. BP and ConocoPhillips, on the other hand, plan to keep capital expenditure relatively flat compared to last year.
Capital expenditure is expected to be 6% lower in 2019 compared to 2018, and 12% lower than the annualized investment level seen in 4Q 2019. Over 2018, we not only witnessed exceptional execution when it came to well performance improvements, but also saw several producers increasing capital budgets relative to the original yearly guidance. As a result, many shale producers maintained the “overspend” trend that has been common practice for the shale industry for years. In addition, a number of producers had their capital program weighted toward the second half of the year.
Figure 2 compares the difference between full year 2019/2018 planned capital reduction and 2019 change relative to the 4Q 2018 capex level on an annualized basis. Permian companies, for instance, are reducing investments this year by 18% compared to the last quarter. Among these, only Diamondback and Parsley show minimal changes compared to the 4Q level. Parsley in particular specified that the efforts to accelerate progress toward cost discipline were undertaken already in 4Q 2018. Bakken companies also display higher discrepancy between full-year guidance and guidance compared to the last quarter.
On average, these producers reduce 2019 spending by 11% relative to 4Q, compared to 5% on year-on-year basis. Oasis Petroleum is among the most significant contributors here. The company reported cuts of over 50% in 2019 relative to the last quarter. Multi-play companies on average are increasing spending this year compared to the level of capital spent last quarter. This applies in particular to Anadarko, which plans to direct as much as 70% of its total investments to the US onshore segment in 2019. While overall capex was higher last year than what is planned for 2019, a smaller overall share was spent on US onshore operations.
Figure 3 displays the guided oil production change for 2019 versus 2018 for a selection of US shale operators. We also separately highlight an implied oil production change relative to the 4Q 2018 performance. Overall, the results indicate that Permian producers, many of which guided for 20% oil additions compared to last year, plan the largest oil output increase this year. Among these, Diamondback and Concho communicate the highest additions, targeting oil growth of 31% and 28%, respectively. At the same time, a majority of the companies with operations focused in other plays guide for a yearly increase of below 15%. Several producers, such as QEP, Oasis and Whiting, even expect a reduction in oil output this year.
During the second half of 2018, a significant number of US producers demonstrated well productivity improvements, performing at the top-end and above the guidance initially provided. The shale industry witnessed a more dramatic expansion of oil production than originally expected last year, and despite guiding 16% year-on-year growth in oil output this year, an average 6% growth in oil volumes is what can be expected in 2019 versus the 4Q 2018 performance. Just a handful of shale operators anticipate double-digit oil production additions versus the last quarter of 2018. Concho Resources, for example, projects 8% oil growth over 4Q 2018 compared to the impressive 28% year-on year target.
As highlighted in the chart above, almost all operators estimate lower 2019 oil production growth over 4Q 2018 compared with guidance for year-on-year growth. Devon Energy and Murphy Oil are two rare exceptions, as both companies guide for a higher 2019 oil production increase versus 4Q 2018 than on a yearly basis. In the case of Devon, however, timing of completions during 4Q affected overall volumes, leading to a lower output than originally planned. A number of shale players estimate a decrease in oil output versus 4Q 2018. Callon Petroleum, SRC Energy, Laredo Petroleum and QEP are among such producers.
Finally, we highlight how guided oil production growth translates into the additions that can be expected from 4Q 2018 to 4Q 2019. If we assume a linear production trend throughout 2019, a 6% growth for the full year 2019 versus 4Q 2018 implies around 11% growth between 4Q 2018 and 4Q 2019.
Figure 4 presents the differences between 2019 oil production growth over 2018 and the corresponding change from 4Q 2018 to Q4 2019. Permian companies show an 11% increase from 4Q 2018 to 4Q 2019, while Bakken and Niobrara are estimated to deliver production additions of just 3% and 5%, respectively. Even though the overall 11% growth rate might not sound as impressive as the guidance we saw during preceding two years, it should be noted that the US base onshore oil production today is also substantially higher than it was one or two years ago. Therefore, if an 11% growth rate is representative for the whole 9.5 million bpd current oil output among lower 48 states excluding Gulf of Mexico, we are still likely to see about 1 million bpd of oil production growth from the US between 4Q 2018 and 4Q 2019.