Per CS: US oil production won't increase much in 2022

Post Reply
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Per CS: US oil production won't increase much in 2022

Post by dan_s »

Note from Credit Suisse Equity Research 11-11-2021

Preliminary 2022 commentary points to low/very modest oil production growth for most E&Ps.
Official budgets will come in February, but some common threads across 3Q conference
calls suggest E&Ps are inclined to stick with something closer to a maintenance scenario
again in 2022: still too much OPEC spare capacity, demand uncertainty, and perhaps most
importantly E&Ps are not yet hearing desire (permission?) from shareholders to grow. The
model is working and at this point there does not seem to be a compelling reason to upset
the apple cart. Without providing formal guidance, several E&Ps effectively committed to
maintenance mode next year (FANG, DVN, OVV, OXY, MRO, EQT, RRC); while a lot
can happen between now and February, our view is that most E&Ps initially guide to flattish
2022 production, keeping some flexibility to add growth capital as the year progresses.
Even when growth does eventually resume, mid-single digits seems like the upper bound.
Post-3Q, our company-level 4Q21/2022 prod’n forecasts were little changed & continue
to imply 2022 US oil growth from our E&P universe of ~2-3% vs. 4Q21 levels.

Continued ramp from private E&Ps drives our 2022 US oil forecast modestly
higher, still ~2% below EIA. Updating into our bottom-up model, we forecast total 2022
US crude production of ~11.7 MMBbld (+5% YoY), up ~1% from our prior estimate of
~11.55 MMBbld. The increase vs. prior CSe was driven by higher rig count assumptions
for the private E&Ps (now running >130 rigs in the Permian, up from ~100 at mid-year &
approaching 50% of total rigs in the basin) and upward revisions to GoM. We see domestic
oil growth overwhelmingly driven by the Permian (+12% YoY, including robust >25% YoY
from private E&Ps). Our revised 2022E is ~2% below EIA/IEA ~11.9 MMBbld, both of
which we think are still underestimating public E&P capex discipline next year (Figure 5).

Early 2022 budget outlooks baking in ~10% inflation; forecast public E&P capex
+20% YoY. Main pressure points are steel/tubulars, diesel and labor. Many E&Ps still
confident some (or even all) the impact could be mitigated by incremental efficiencies/self
help. Several gave initial ranges on 2022 capex which in our view helps de-risk their
February announcement: DVN, FANG, OVV, HES & to a lesser extent MRO, APA. Post
3Q we raised 2022 capex forecasts ~5% on avg; we now see public E&P spending +20%
YoY, still implying a historically low re-investment rate of just ~36% at strip prices (Fig 4).

Bigger/better cash returns continue to resonate. The market continues to reward
E&Ps committing to incremental return of cash to shareholders: EOG, APA, DVN, FANG
and MRO all outperformed post-print. E&Ps with the highest 2022-23E total cash return
yield at strip: MRO, DVN, PXD, OVV, CTRA, APA, COP, FANG (Fig 2). Of those yet to
provide a formal commitment, we think EQT’s will be most meaningful (potential to offer
above-avg. ~10% yield; announcement by YE21); OXY/RRC less competitive in our view.

What surprised us the most: 1) APA larger payout commitment (60%+ of FCF),
though we see its total cash return yield fading vs. peers beyond 2023; 2) PXD relative
underperformance (good 3Q print, much better price for Delaware, divi raise, buyback
optionality); 3) CLR's Permian entry (accretive on paper, but strategic rationale unclear).

E&Ps pricing in ~$54 WTI, 14% below back-end of curve: more attractive vs. pre-3Q
(7% discount), near widest relative discount YTD. Top picks: DVN, OVV, PXD, EQT, KRP.
Dan Steffens
Energy Prospectus Group
Fraser921
Posts: 2955
Joined: Mon Mar 22, 2021 11:48 am

Re: Per CS: US oil production won't increase much in 2022

Post by Fraser921 »

>CLR's Permian entry (accretive on paper, but strategic rationale unclear).

Dear analyst, let me clarify strategic rationale unclear :lol:

1. borrow at 2.5% and earn 15 %
2. Bullish on oil outlook
3. Desire to be more oily
4. Upside to 15 % if oil is above $65
Post Reply