Today we will start with a look at Occidental Petroleum, which has been in the spotlight since its $58 billion acquisition of Anadarko Petroleum in mid-2019. The timing of this purchase, coming right before the oil price plunge in late 2019 and the onset of the pandemic, couldn’t have been worse for Oxy, which piled up massive debt by financing the $19 billion cash portion of the purchase price and assuming Anadarko’s $20 billion in liabilities. As a result, Oxy reduced its capital spending by 80% from $9 billion in 2019 to $2 billion in 2020 and slashed its quarterly dividend from $0.79/share to a token $0.01/share. Asset sales and surging commodity prices, which more than doubled cash flow from operations from $3.9 billion in 2020 to $10.4 billion in 2021, allowed Oxy to retire $6.7 billion in debt.
With cash flows expected to continue rising in 2022, Oxy raised its oil and gas investment from $2.4 billion to $3.3 billion, which accounts for about two-thirds of the total capital spending increase in our Oil-Weighted peer group. But the driver of Oxy’s increase is not boosting near-term output to take advantage of higher oil prices — the company is guiding to flat production in 2022. Rather, Oxy is restoring investment to sustain long-term output after its draconian post-pandemic spending plunge. After suspending development in 2020, Oxy is resuming drilling of its extensive Permian enhanced oil recovery (EOR; see The Air That I Breathe) reserves, which it augmented with an opportunistic $285 million acquisition. The expanded budget also enables it to rebuild its depleted inventory of drilled-but-uncompleted wells (DUCs) in the Rockies. Oxy also is funding development of previous Gulf of Mexico discoveries and initiating an expansion of its Al Hosn gas project in Qatar. Finally, the increased budget accounts for an estimated $200-$300 million in service cost inflation. The higher 2022 spending supports Oxy’s long-term projection of less-than-5% annual production growth while allowing for the retirement of an additional $5 billion in debt, raising the quarterly dividend from $0.01/share to $0.13/share, and repurchasing $3 billion in stock.
As shown in Figure 2, the 17 Oil-Weighted E&Ps we follow are increasing capital spending by 17% to just under $20 billion in 2022 (blue bar to far right, left axis) –– 33% higher than the 2020 low point but still 42% below 2019’s pre-COVID level and nearly 63% lower than spending in 2014, when oil prices last reached $100/bbl. The median increase in 2022 capital spending by the oil-focused producers is 21%, with investment rising for 16 of the 17 companies. However, the higher spending is expected to increase output by only 3% in 2022, to 1.714 billion barrels of oil equivalent (boe; right end of yellow line, right axis), with only 10 companies guiding to higher production.
The six oil-weighted producers with capital budgets of more than $1 billion — EOG Resources, Pioneer Natural Resources, Occidental Petroleum, Devon Energy, Diamondback Energy, and Marathon Oil — account for 77% of the peer group’s total investment, or $15.4 billion, a 10% increase over 2021. However, these half-dozen producers, which account for 84% of forecast 2022 peer group output, are guiding to a minimal 1% production increase as they focus on boosting free cash flow to increase shareholder returns. After Oxy, Marathon Oil is budgeting the second-largest increase among the Big Six, a 27% boost to $1.2 billion that the company says is necessary to maintain flat 2022 output from its major U.S. unconventional plays, primarily the Eagle Ford and the Bakken. However, that still represents a low 30% reinvestment rate, consistent with Marathon’s focus on growing shareholder returns, and management said that the company does not plan to deviate from its budget even if strong commodity pricing continues. Pioneer, in turn, is guiding toward 2% increases in investment and production, while Diamondback Energy is targeting flat spending and output. Both are focusing on boosting cash flow to fund variable dividends that could bring total 2022 shareholder returns to 10% or higher. EOG Resources is keeping capital investment level at $3.6 billion but expects 5% production growth from its 2020 decision to focus on its “double premium” wells that meet what it calls “the most stringent investment hurdle rate” in the industry.
The largest capital spending increases in the Oil-Weighted peer group come from smaller companies that have adopted aggressive growth programs to achieve the scale necessary to position themselves as potential acquisition targets or to initiate meaningful shareholder return programs. Earthstone Energy is tripling investment from $134 million in 2021 to $400 million in 2022 after purchasing five smaller Permian producers over the last 15 months for a total of $2 billion, the most aggressive acquisition program in the play. Earthstone’s 2022 output is expected to double, largely from the acquisitions. HighPeak Energy, a Midland Basin E&P created in mid-2020 after a reverse takeover by special purpose acquisition company (SPAC) Pure Acquisition, is pursuing largely organic growth by tripling its drilling and completion investment to $738 million in 2022. Talos Energy and Denbury Inc. are expected to increase their capital investment by 73% and 71%, respectively, to target longer-term output goals. Talos is increasing its 2022 capex to $465 million, mostly second-half-loaded, as development begins on three deepwater Gulf of Mexico projects that will boost long-term output. Denbury is increasing its capex to over $300 million in 2022 to expand the carbon-dioxide (CO2) infrastructure that supports its EOR production.
Click here for tables showing the Oil-Weighted E&Ps’ capex and production guidance.
The Diversified E&P peer group, as shown in Figure 3, is increasing capital outlays by 27% (median 29%) in 2022 to $19.9 billion. That level of investment is nearly 30% below the group’s capital spending in 2018-19 and about one-third of the amount invested in 2014. Thirteen of the 15 companies in the peer group are increasing investment, while two are showing modest decreases. Oil & gas production by the Diversified E&Ps is expected to rise 11% in 2022 to 1.685 billion boe, with all but one company (Ovintiv) in the peer group increasing output.
The 2022 guidance for this peer group is heavily influenced by acquisitions. This is reflected in the budget of ConocoPhillips, the largest U.S. E&P, whose $7.1 billion of 2022 capex represents 35% of total peer group investment. In mid-2021, Conoco announced a revised 10-year plan that called for average annual investment of $7 billion to generate 3% compound annual production growth. The 2022 spending announced early this year raises the company’s total expenditures by 29%, from $5.5 billion to $7.1 billion. The largest component of that increase is $700 million allocated to the Permian properties acquired from Shell for $9.5 billion, a deal that closed on December 21, 2021. Another $400 million is tied to increased Lower 48 activity that partially reflects the $13.3 billion acquisition of Concho Resources that closed in January 2021. Conoco allocated $200 million for the net impact of inflation, partially offset by efficiency gains, and another $200 million for emissions-reduction projects. The remaining spending relates to ongoing long-term development projects in Conoco’s Alaska and international portfolios. Conoco’s 2022 production guidance reflects an 11% –– or 63 million boe (MMboe) — production increase, all of which is accounted for in the 73 MMboe in estimated 2022 production from the acquired Shell assets. Excluding the Shell acquisition, 2022 output would be flat.
Hess Corp., the second-largest spender in the Diversified peer group, is raising investment by 29% to $2.6 billion, with the lion’s share of the increase allocated to development of its massive offshore Guyana discoveries. Hess is boosting Bakken development to harvest cash flow to help fund Guyana, but forecasts just a 1% overall output growth in 2022. Continental Resources is raising capex by 34% to $1.8 billion after spending $3.2 billion to enter the Permian Basin and $700 million to enter the Powder River Basin. The deals are expected to increase production by 16%. Intense Denver-Julesburg (DJ) Basin consolidation is also reflected in the 174% increase in 2022 investment by Civitas Resources, which was created by Bonanza Creek Energy’s acquisitions of HighPoint Resources, Extraction Oil & Gas, Crestone Peak Resources and Bison Oil & Gas, and 61% higher spending by PDC Energy, which bought Great Western Petroleum for $1.3 billion. Northern Oil & Gas, a publicly traded company that invests solely in non-operated assets, is expecting a near 90% increase in capital investment to $383 million as the company spent $750 million expanding into the Marcellus Shale and the Permian.
Partially offsetting the acquisition-related investment and production growth in the peer group are 3% and 5% investment reductions by major producers Ovintiv and SM Energy, respectively. Both are prioritizing debt reduction to free up cash for future shareholder returns. APA Corp. (formerly Apache) is raising spending by just 1% to $1.4 billion, which reflects a modest decline in U.S. investment to offset higher spending in Egypt and exploration off the coast of Suriname. Ovintiv and SM Energy are forecasting flat 2022 output, while Apache targets maintenance-level U.S. production and overseas growth.
Click here for tables showing the Diversified E&Ps’ capex and production guidance.
As shown in Figure 4, the Gas-Weighted peer group is forecasting a strong 32% increase in capital expenditures to $8.8 billion after a slight decline in 2021. This level of capital investment is still one-third below the 2018 high and 56% lower than in 2014. The median gain in capital outlays among the group’s 11 E&Ps is 18% in 2022, with every company increasing its capex. Oil and gas production is expected to be up 10% for the gas-focused E&Ps in 2022 to 1.7 billion boe — twice the output reported in 2014. Six of the companies in the peer group are forecasting an increase in output, with three flat and two declining.
As with the Diversified E&Ps, acquisitions are driving the increases in investment and output in the gas-weighted group. Southwestern Energy has catapulted into the top investor, raising capex by 74% from $984 million to $1.7 billion after spending nearly $5 billion to acquire Haynesville producers Indigo Natural Resources and GEP Haynesville in 2021. Rising Gulf Coast gas demand drove the E&P’s shift in investment focus from the Marcellus to the Haynesville, where Southwestern is planning to run nine rigs as its total output increases 38%. After shedding massive debt through bankruptcy restructuring, Chesapeake Energy emerged with a pristine balance sheet and restored equity value to acquire Haynesville producer Vine Energy for $2.1 billion and Marcellus private operator Chief Oil & Gas for $2.6 billion. Post completion, Chesapeake is raising its 2022 capex by 80% to $1.45 billion and guiding to a 27% production gain. Excluding Chesapeake and Southwestern, the peer group is increasing capital spending by 15% and targeting 2% production growth. EQT Corp., the largest U.S. gas producer, is raising capex by 9% after acquiring Chevron’s Marcellus assets and expects 8% production growth. Other major Marcellus producers Antero Resources, Range Resources and CNX Resources are raising investment in line with inflation but expecting flat output. Coterra Energy, created when #2 Marcellus producer Cabot Oil & Gas merged with Permian and Eagle Ford E&P Cimarex Energy, is raising spending by 18% but expects a 3% decline in production.
Click here for tables showing the Gas-Weighted E&Ps’ capex and production guidance.
At first glance, it might seem that E&Ps might be drifting away from their conservative investment strategies and deciding instead to ramp up their capex and production in response to higher crude oil and natural gas prices. But with a deeper examination of the peer groups and individual producers, it becomes clear that much of the increase in capital spending reflects cost inflation and some of the rest is tied to either rebuilding DUC inventories or to developing newly acquired assets. The headline news of a forecast 8% gain in production is muddied by some of the same factors and when acquired assets are taken into account, the forecast production growth for 2022 is much less optimistic. In the next blog in this series, we’ll look at the E&Ps’ earnings and cash flow allocation.
“I Can't Go for That (No Can Do)” was written by Daryl Hall, John Oates and Sara Allen. It appears as the third song on side one on Hall & Oates’s 10th studio album, Private Eyes. Released as the second single from the LP, it went to #1 on the Billboard Hot 100 Singles chart, becoming the duo's fourth #1 single. Recorded at Electric Lady Studios in March 1981, it became one of the most highly sampled songs in hip hop. Personnel on the record were: Daryl Hall (lead and backing vocals, synthesizer, drum machine), John Oates (backing vocals, electric guitar), Charles DeChant (saxophone) and John Siegler (bass).
Private Eyes was recorded at Electric Lady Studios in New York City in 1980-81 and produced by Daryl Hall, John Oates and Neil Kernon. Released in September 1981, the LP went to #5 on the Billboard 200 Albums chart and has been certified Platinum by the Recording Industry Association of America. Four charting singles were released from the album.
Hall & Oates (Daryl Hall and John Oates) are an American pop, rock and R&B duo formed in Philadelphia in 1970. They have released 18 studio albums, 11 live albums, 27 compilation albums and 63 singles –– 29 of which made it to the Billboard Hot 100 Singles chart. The duo are members of the Rock and Roll Hall of Fame and Songwriters Hall of Fame, and have a star on the Hollywood Walk of Fame. Both Daryl Hall and John Oates have had successful solo careers outside of Hall & Oates and are currently on tour as solo artists. The duo's last release was in 2006, and their last tour together was in 2019.