CapEx Spending

[dan_s]

Raymond James, September 26: "After two years of a complete meltdown of U.S E&P cash flows (down about 75% since 2014) and spending (down about 80% since 2014), we believe 2016 will mark the bottom for industry cash flow generation and oilfield spending on drilling and completions. We believe this bottom will be the case whether you believe the more bearish oil and gas futures strip pricing or our more bullish 2017 oil and gas price outlook. At the current $50ish 2017 WTI oil futures prices, U.S. E&P cash flows should still rise by about 15% next year. Using our much more bullish 2017 oil price deck that calls for a massive $30+ oil price increase (or ~65% higher than current futures prices), 2017 U.S. industry cash flows would explode upward, rising 170% over 2016 levels."

I agree with RJ on the comment below. The primary reason I believe the world is headed toward an oil supply shortage as soon as 2018, is because this cycle has devastated the oilfield services industry. - Dan

Raymond James: "Initially, we expect E&P spending to follow rising cash flows; however, emerging industry bottlenecks in pressure pumping will likely limit the industry’s ability to spend as much as they would like under our oil price outlook. This inability of the oilfield service industry to respond to rising demand for services on a timely basis is a big part of our logic for 2017/18 oil prices overshooting a more sustainable long-term oil price in the $60-70 range. Put another way, we see oil futures understating where oil prices need to be in 2017 and 2018 to repair the seriously injured U.S. oilfield service industry and eventually remove the cap on U.S. supply growth constraints (as detailed by our team’s stat earlier this month). So how bullish can you be? We are convinced that the worst oil downturn in 30 years is now behind us and investors would do well to prepare themselves for a meaningful recovery over the next few years. It is also important to note, since cash flows have dwindled to such low levels, the leverage to oil prices from a percentage increase perspective is substantial."

"Since U.S. companies are currently operating at relatively low cash flow margins, their cash flows are extremely sensitive to small changes in oil and gas prices. In fact, even under the modest $6 projected y/y average oil price increase implied by oil futures strip oil prices, y/y cash flows from U.S. E&Ps should actually increase 15% next year. Keeping in mind that both Raymond James and Street consensus oil price expectations are calling for a substantially higher than “strip” oil price environment in 2017, these U.S. producer cash flows are likely to spike much higher next year. Specifically, under current Street consensus oil price expectations, E&P cash flows are expected to jump by ~50%. Taking it one step further, on our group’s bullish $80 oil price forecast, E&P cash flows are expected to jump by 170% next year. We calculate that just a $10 move in oil prices will drive about a 60% swing in cash flows."