US liquids output totalled 17.74 mb/d in March, higher y/y by 1.95 mb/d, with NGLs production hitting yet another record high (+0.56 mb/d y/y). The total figure was broadly in line with our estimates for the month at 17.64 mb/d, with crude forecasts accounting for the small variance. US crude production increased after two consecutive months of declines, up m/m by 0.24 mb/d in March to 11.91 mb/d, higher y/y by 1.45 mb/d. The March m/m change was higher than our projection of an increase of 0.14 mb/d m/m, as Gulf of Mexico (GoM) production came in higher than expected (+0.19 mb/d m/m to 1.91 mb/d), completely offsetting declines seen in February. Higher production was also seen in North Dakota (+45 thousand b/d m/m), New Mexico (+23 thousand b/d m/m), and Oklahoma (+16 thousand b/d m/m), while Texas (-6 thousand b/d m/m) and Colorado (-17 thousand b/d m/m) both saw m/m declines.
Following a disappointing Q4 18 when prices and differentials collapsed, many E&Ps issued 2019 guidance that revealed stable-to-lower Capex estimates alongside healthy production growth estimates, a solid step toward capital discipline. Despite a reduction in Capex of 10-15% across many names, we believe that y/y US crude production growth of 1.3 mb/d (with liquids growth of 1.8 mb/d) is achievable via ongoing productivity advancement and more well completions. Companies are not restricting themselves to capital programmes for change—general and administrative expenses have been cut across many names, from executive compensation to headcount reductions and bloated facilities costs. Devon liquidated its Canadian operations this week, and Pioneer enacted a significant workforce reduction. These firms can achieve greater capital discipline this year as they rein in capital and administrative spending. We expect completions to surge later this year after pipeline takeaway capacity improves in the Permian and after gas plant capacity increases in areas such as the DJ Basin. Still, frac spread counts recently fell from 482 in April to 455 last week, and rigs have retreated from 1,083 at year end to 984 this week—and with the recent sharp correction in prices, activity may take a slight pause again. This trend would need to reverse, or the efficiencies of the frac crews would need to rise, to increase production further, possibly after additional industry consolidation occurs.
While further consolidation is expected, billionaire activist investor Carl Icahn has challenged Occidental’s $38 billion takeover of Anadarko this week. The high cost of the acquisition—which required Occidental to secure a $10 billion preferred investment from Berkshire Hathaway to seal the deal—further complicates the situation, just after Occidental outbid Chevron. With many firms for sale, the Icahn case will be watched carefully, along with other factors, to gauge investor appetite for M&A that can help the industry achieve greater efficiencies.