Higher prices have revived capital spending onshore, though most new offshore projects remain uneconomic. Capital spending will increase by about 10% this year, after a 30% increase in 2017, and E&P firms are likely to maintain good access to funding sources.
Meanwhile, activity in mergers and acquisitions will be more strategic after a wave of tactical acquisitions, divestitures, and swaps in 2016-17. Producers with strong balance sheets will seek efficiencies of scale in higher-return basins, while smaller, sometimes over-leveraged firms will look to combine with larger ones to accelerate development. High valuations relative to cash flow will keep financial firms on the sidelines, with strategic mergers or all-stock acquisitions likely to make the most economic sense for E&P companies with similar valuations.
And following a surge in drilling and completion costs last year, E&P capital costs could inflate 10-15% in 2018, cutting into cash flow growth. Oil field services firms are regaining their pricing power, particularly in prolific onshore basins, though large oil and gas producers with significant purchasing power will be able to limit cost increases. Local sourcing of sand, wherever feasible, will limit completion cost increases for companies. E&P firms will also look for cost efficiencies through supply-chain management, drilling mainly in prolific plays, and M&A deals.
Producers debt-funded high-capital spending in 2010-14 to increase production when oil prices were high. While E&P companies have improved efficiencies and reduced costs during the downturn, overall debt balances will remain elevated this year despite stronger cash flow and liquidity, Moody’s says.
Smaller firms have reduced their debt balances through restructurings and bankruptcies, but the largest companies’ aggregate debt balance is still in line with 2014 levels. And although some larger firms have paid down debt, others intend to use their improved cash flow to increase shareholder returns.
