A double-dip in oil prices over the past few months has dashed hopes raised in May that prices would hold steady at $60/bbl.
As uncertainty lingers about future oil-price levels, companies remain cautious about their capital expenditure plans, safeguarding as best they can for a lower, more-volatile price environment. ConocoPhillips, as an example, reported it would further pare its budget to $11 billion this year compared with prior forecasts of $11.5 billion and $13.5 billion (OGJ Online, July 16, 2015).
Meanwhile, market analysts also are revisiting their original capex expectations set earlier this year, as well as gauging possible spending trends for 2016.
The 80s-again?
Barclays' equity research team recently released a midyear update to its upstream spending survey. The previous two versions were published in January and February.
According to the most recent survey, Barclays now expects global upstream spending to decline 20% in 2015 vs. their February estimate of a 23% decline and their initial 9% decline estimate in January, back when companies were basing budgets on crude oil fetching $65/bbl.
Barclays' preliminary estimates for 2016 are for spending to decline 3-8%, which would mark the first time since 1986-87 for consecutive annual spending declines.
The survey also shows North American upstream spending declining 35% in 2015-a downward revision from 30% in February.
"The decline could fall even more if oil prices drop back down to $30/bbl as spending by North American independent E&Ps is mainly driven by cash flow," Barclays said, adding, "Most small North America E&Ps surveyed need $70/bbl (West Texas Intermediate) to increase activity. Despite lower service pricing, smaller E&Ps have indicated they are not expecting to increase spending until oil prices raise materially, with 67% needing $70/bbl or higher."
Based on cash flows generated at WTI prices ranging $50-60/bbl along with appropriate reinvestment ratios, Barclays' preliminary 2016 estimates show North American spending down another 10-15% from 2015 levels.
"Back in May, the expectation was for spending to increase modestly in 2016, a reasonable consumption considering spending has not fallen in two consecutive years since 1986-87, almost 30 years ago. However, that expectation has moved materially lower in recent months with oil prices taking another leg down," Barclays explained.
Offshore, midstream spending
Barclays estimates total offshore spending, representing about 20% of global upstream spending, of $100 billion in 2015, lower than the $110 billion February estimate, due to a slew of dayrate reductions and notable terminated contracts.
"While cuts to E&P budgets were pronounced in 2015, the offshore sector was somewhat shielded from the ironclad nature of offshore rig contracts. In fact, we note that during the 2008-09 downturn, the offshore sector was barely impacted-even in the wake of the Macondo tragedy, rig contracts were upheld," Barclays said, adding, "But the next several years will be a different story as rigs start to roll off contract, with very few being recontracted in the current environment."
With very few offshore projects economic in the current oil price environment and exploration being the obvious target of budget cuts, Barclays estimate offshore spending in 2016 to fall 20-25% from 2015 levels.
Separately, Moody's also has changed its outlook to "stable" from "positive" for the global midstream energy industry. The outlook had been positive since September 2010, reflecting heavy levels of energy system spending, largely for US oil and natural gas shale development, which generated substantial midstream earnings growth.
Now, deep cuts in capex plans and slowing exploration and production, along with weak natural gas and natural gas liquids prices, have reduced midstream spending on growth projects.
"Growth in capital spending has likely peaked after 15% annual increases in 2013-14, and will likely decline in the aggregate by 2-5% in 2015, with uncertain growth prospects looming in 2016," Moody's said.
