The damage caused by low oil prices is still being felt
A few large oil companies may have loosened their purse strings recently, but that doesn’t mean an end to austerity in the industry as companies are still suffering from the effect of low oil prices.
Just last week, Apache Corp. APA, +3.44% increased its capital expenditure plan by $200 million to $2 billion to develop what it called an “immense” oil and gas field in one of west Texas’s basins. EOG Resources Inc. EOG,+2.83% announced plans to buy Yates Petroleum Corp. in a stock and cash deal valued at a $2.5 billion.
Earlier this week, Anadarko Petroleum Corp. APC, +2.36% plunked down $2 billion to buy oil and gas assets in the deepwater Gulf of Mexico from mining giant Freeport McMoRan. FCX, -0.20% And in July, Diamondback Energy bought $560 million worth of leases and related assets in west Texas from an undisclosed partner and raised its forecast for capital spending this year to foot the bill.
Energy companies have weathered nearly two years of low oil futures prices, from the summer of 2014 when prices were hovering well above $100 a barrel to the mid-$40s of recent sessions.
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While specific asset buying is routine — for Anadarko, it was a way to snap up assets in fields it already had stakes in, and the company is funding the move by selling shares —capital expenditure increases are rarer, said Pavel Molchanov, an analyst with Raymond James.
Energy companies will determine their 2017 spending decisions in December or January, and much will hinge on where oil futures prices are at the time, Molchanov said.
Capital budgets “will have to move meaningfully higher” next year to avoid supply declines, he said.
If prices remain under $50 a barrel, there will be little incentive to “significantly boost” levels, he said. Raymond James is expecting oil to be trading at around $60 a barrel by the end of the year.
“Companies will have to get out of their austerity mode” towards a more sustainable model, Molchanov said.
Companies cut their spending budgets by an average 25% last year, and Molchanov predicted more declines — around 20% — this year.
For Stewart Glickman, an analyst with S&P Global, there’s another way to think about the spending trajectory: Before oil futures fell off the cliff, companies were essentially “chronically overspending,” and Wall Street didn’t much care.
They are learning to live within their means these days, he said. This year will likely mark the industry’s low point in spending, with increases in store for 2017, Glickman said.
Those companies that have been spending were “selective,” and they had the financial flexibility to handle it, said Brian Youngberg, an analyst with Edward Jones. “A lot of companies don’t have that flexibility,” he said. That will come if oil futures rise to around $55 a barrel — and an inflection point for prices may not arrive until mid 2018, Youngberg said.
Companies are understandably skittish as “we have had some false starts in prices, especially last year,” he said.