In this Insight, we evaluate the Q4 16 reports of 16 of the main independent E&P companies in North America (see Figure 1 for full list) that were released last month.
Last year, in the face of low prices, many producers focused on preserving balance sheet strength, by concentrating on improving well productivity through drilling longer laterals, reducing drilling times, and optimising completions in order to maximise production per dollar spent. Some major players, such as Anadarko and Devon, sold assets in order to focus on their highest-yielding areas.
In 2016, capital expenditures across our sample of producers fell precipitously, by $16.8 billion (-43%) y/y. According to the latest reports, their combined production fell by a more modest 0.13 bcf/d y/y in 2016 to below 16.5 bcf/d. While production by the group fell by 0.18 bcf/d y/y in Q4 16, producers concentrated on the Northeast (Marcellus and Utica) continued to grow their output, as relentless efficiency improvements helped buoy volumes despite the low prices. As drilling efficiencies have lowered costs, apparent breakevens have fallen, with some producers citing costs of production of around 1.0 $/mmbtu in the Northeast.
With higher oil and gas prices, producers are beginning to regain their appetite to deploy capital and drill more wells, which ought to translate into stronger production volumes later this year and next. Across our sample, producer guidance for 2017 shows Capex up by nearly $4 billion (17%) y/y. Still, the estimated 2017 total spend of $26.1 billion was a far cry from the $39 billion spent in 2015. Assuming companies achieve their upper-end of guidance for 2017, aggregate production across the group could increase by 0.53 bcf/d (3%) y/y to just under 17 bcf/d.
The 16 independents we analysed have around 10.2 bcf/d of their production hedged for 2017, which represents about 60% of their aggregate output. This compares to the same time in 2016, when around 50% of production was hedged, and shows that higher prices have begun to encourage more producer hedging. While companies have more production hedged in y/y terms, they remain much less hedged than in 2014, when around 75% of production was locked in due to higher prevailing prices and better credit terms.
On the whole, the outlook for 2017 and 2018 is certainly more positive than it was at the beginning of last year. With companies pursuing more ambitious capital programmes to deploy more rigs, the production outlook is positive, and while Q1 17 production levels remain lower y/y, the increase in capital and rigs should start to be felt from mid-2017.