THE WORST IS OVER, said oilfield service giants Schlumberger and Halliburton about the state of oil markets during earnings calls in late July. The downturn has dragged on longer than many expected, so there is something mildly comforting about such a declaration, true or not, when it falls from the mouths of dominant industry players. Perhaps even more so as it comes during a month with a 12% drop in oil prices that erased months of incremental gains. Those gains helped spark hope that $60 oil was not far off. At press time, $40 oil looks closer.

This kind of market volatility, not surprisingly, led the industry to a state of reduction in every sense of the word. For the sake of brevity, I'd like to focus on upstream capex reductions by those in the US Lower 48. Recently, Wood Mackenzie noted that "of the more than US$370 billion in global capital expenditure cut by upstream developers across 2016 and 2017, US$150 billion was slashed in the US Lower 48 alone-more than three times any other single country."

Along those lines, Cowen and Company said it expects to see US spending decline 45% compared to its year-end 2015 estimate (published in January), which indicated a decline of 22%. "The aggregate 45% decline is the most severe decline in the history of this survey," Cowen noted. The numbers were published in July as a midyear update to its 2016 E&P Spending Survey. Oil majors are still feeling the squeeze, and are anticipated to reduce spending by 26%, Cowen analysts said, but it's the independents, the group most referenced in OGFJ, that will continue to retract the most. The survey noted an expected spending reduction by independents of 54%.

Of course, oil prices, and spending plans dependent upon them, are moving targets. In terms of spending in the US onshore, Cowen identified a few companies increasing 2016 budgets in step with oil price improvements. Three examples: Pioneer Natural Resources, Devon Energy, and Energen.

In conjunction with its acquisition agreement with Devon Energy to acquire approximately 28,000 net acres in the Midland Basin for $435 million and management's improving outlook for oil prices, Pioneer Natural Resources expects to increase its horizontal rig count by five rigs from 12 rigs to 17 rigs in the northern Spraberry/Wolfcamp in late 2016. The company's 2016 capital budget is expected to increase by approximately $100 million from $2.0 billion to $2.1 billion as a result of the rig additions.

On the flipside of that transaction is Devon. The company has entered definitive agreements to sell non-core assets to the tune of $2.1 billion. The Oklahoma City, OK-based company now expects its full-year 2016 upstream capital program to range between $1.1 billion and $1.3 billion, higher by $200 million at the midpoint. The incremental capital investment will be deployed in the Delaware Basin and the Oklahoma STACK play beginning in the third quarter of 2016 with the addition of three operated rigs.

Energen increased its 2016 capex budget for a second time, up 20% from its first revision and up 80% from its preliminary guidance.

Again, these are all moving targets, but it seems some operators are cautiously optimistic about the prospect of a moderate increase in prices, and thus, an increase in upstream spending, possibly turning the tide for budgets slashed in recent years. Further evidence of this was found Cowen and Company's E&P mid-year spending outlook survey, and another from Evercore ISI.

For its mid-year survey report, Cowen and Company asked companies to indicate the range in which they believe their 2017 capex would fall given an average oil price of $50 and an average natural gas price of $4/MMbtu. Most respondents, 72%, said that they would increase their 2017 budgets relative to 2016, with 5% holding budgets flat and the remaining 23% decreasing 2017 spending. Importantly, 45% said that their 2017 budgets would be up by more than 15%, while 27% expected an increase of 0-15%.

Results from Evercore ISI's survey also looked at oil at $50, with respondents similarly indicating an increase in upstream spend next year if oil stays above $50/bbl for the remainder of this year. Under that scenario, a strong 73% of those surveyed would expect to increase spending in 2017. Of those, one-third expect to increase 2017 capex by more than 25% relative to their 2016 spending levels, and 20% plan to increase capex by up to 5%.

Cost cutting has been the rule in this post boom environment, but there are indications that prices will rise into 2017. Rise or fall, companies will continue to adjust as prices move the target. We'll keep an eye on the process.

Surveys indicate hope for decimated CAPEX budgets

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