More than 75% of dedicated US shale oil companies keep reporting CAPEX in excess of CFO

November 30, 2018

Equity shale investors have been pushing the industry towards moderation of spending growth since 2017. While the market is convinced that shale wellhead economics offer attractive returns in many areas of major US basins even at $50 per barrel WTI, the pace of shale spending acceleration along with its macro implications keeps scaring financial markets. Essentially, the market is still not convinced that a typical shale oil E&P is able to grow in a self-sourced manner as more than 75% of dedicated US shale oil companies keep reporting capex figures in excess of cash flow from operating activities. Exceptions from this rule are some large independents with diversified portfolios and a few of the largest pure-shale operators (EOG Resources, Continental Resources, Concho Resources), though the last two are yet to demonstrate positive free cash flow to equity.

The figure shows free cash flow to equity (FCFE) and the ratio of capex to cash flow from operating activities (CFO) with all cash flow statement items aggregated over the first three quarters of 2018. In addition to dedicated shale E&Ps, we show majors (ExxonMobil, Chevron, BP, Shell, Eni) for reference and benchmarking purposes. While shale is an important part of most majors’ portfolios, it hardly drives corporate-level cash flows for any of them. Majors spent anywhere between 49-67% of their CFO in 2018 on capital expenditures. In addition, they generated $4.7-11.2 billion of FCFE in the first nine months of 2018.

When it comes to shale operators, EOG generated ~$0.9 billion in FCFE throughout 1Q-3Q 2018, the highest level among pure E&P players (i.e. excluding Oxy with integrated midstream and chemical segments). The majority of mid-size Permian companies with aggressive growth ambitions find themselves in negative FCFE zone with capex exceeding CFO. It should be noted that most of them emphasize that it is still a natural state given where they are in the growth cycle. Positive free cash flow is guided from 2019-2020.

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