US crude production fell m/m by 0.11 mb/d in December 2017 to 9.95 mb/d, but was still higher y/y by 1.18 mb/d on a low base. Total liquids production averaged 15.06 mb/d, lower m/m by 0.24 mb/d but higher y/y by 1.77 mb/d. The m/m decline in crude output compares to our expectations of no fall, as the 0.13 mb/d fall in GoM output was larger than the 50 thousand b/d we anticipated. Importantly, this offline GoM production is unlikely to return until February, as Shell kept its Auger system offline until then following a fire at Enchilada. This will compound the onshore declines we expect to see in January data due to freeze-offs. Our short-term production model uses gas pipeline scrape data to forecast crude oil production, and these scrapes dropped notably m/m in January. Combined Texas & New Mexico output (a proxy for the Permian and Eagle Ford) growth of 62 thousand b/d m/m in December 2017 was in line with our expectations, significantly slower than the 0.23 mb/d and 0.12 mb/d of m/m growth in October and November 2017. We expect Permian output to drop m/m in January as freeze-offs knocked as much as 70 thousand b/d of production offline m/m. Similarly, the Williston and DJ output are also likely to fall for the same reason—by 27 thousand b/d and 32 thousand b/d m/m respectively. Together, these numbers imply a 0.13 mb/d m/m drop in US crude production in January; a big call given m/m growth averaged 0.15 mb/d in Q4 17. Looking back at previous freeze-offs, this number does not seem outlandish. Indeed, in January 2015, production dropped by around 0.1 mb/d m/m due to freeze-offs related to the polar vortex.
Despite the cold weather at the start of the year, activity levels remained robust in January and February. The Delaware basin added 22 rigs and producers in the Midland have drawn DUCs for seven straight months. Bakken rigs rebounded by four in February after producers had reduced rigs for six months in a row. Similarly, gas pipeline scrape data indicate an impressive m/m pick-up in February and Shell has announced that Auger returned to service mid-month. This means that February production growth could once again rip higher, and our short-term model predicts a rebound of 0.21 mb/d m/m. However, in April, lower output in the GoM will again haunt US production. Information remains scarce at this stage, but there are rumours of work on Amberjack and at the Ursa platform that could take some 0.1 mb/d of GoM output offline again.
The large cap earnings season is nearing completion. Supported by higher realisations and production growth, cashflow generation outpaced the increase in Capex, yielding free cashflow for only the second time in the past 16 quarters. Profitability turned positive, debt was reduced and returns to shareholders were increased via buybacks. Still, the sector continues to underperform oil prices with the XOP down by 13% in the year-to-date.