Morgan Stanley expects D&C spending to stay flat - Aug 2

[dan_s]

Devin McDermott – Morgan Stanley
August 2, 2021 4:01 AM GMT

Capital discipline holding. In-line with our 2Q earnings expectations (see 2Q Preview: Can Discipline Hold?) producers have so far maintained budgets and disciplined messaging despite oil holding above $70/bbl. With several companies reporting last week, disciplined execution on capital plans thus far supports our constructive view on the sector and is key to boosting investor confidence in the sustainability of the industry's free cash flow inflection. Early in the quarter, oil-weighted E&Ps have beat consensus on EBITDAX and CFPS by 6% and 9% on average, respectively. On the other hand, gas-weighted peers have fallen short of expectations by 2% on EBITDAX and 5% on CFPS, supporting our preference for oil exposure over nat gas. Looking ahead to this week's earnings, we expect companies to continue to maintain disciplined financial frameworks and direct excess FCF to debt reduction and shareholder returns.Rising cash returns, with an emphasis on debt reduction and dividend growth. Companies that reported during the first week of earnings showed strong capital discipline, with none of our coverage increasing organic D&C budgets (see 6). Instead, companies have focused on reducing leverage and increasing shareholder returns, particularly for the oil weighted names.