Most public E&Ps have released their 2018 capital budgets at this point. Analyzing these plans and how capital allocation has changed over time can shed light on where production is trending in the near term. What does the data tell us? That the Permian is eating up all the capital from other major liquids focused regions.
Granted, as we saw throughout 3Q’17 earnings calls, capital budgets can change to match circumstances, but they do provide a road-map for how each company is thinking about its assets at the moment. For example, Pioneer drastically reduced investment in the Eagle Ford after 2015, so it’s no surprise that those assets are expected to be divested in 2018.
The chart below shows the distribution of planned 2018 US drilling and completion (D&C) capital for 50 public E&Ps. Of the liquids-focused regions, the Permian is attracting 51% of the US D&C dollars, while the producers in this sample are sending roughly 90% of their D&C capital aimed at gas-focused regions to Appalachia. There’s no surprise that the Permian Basin commands a large majority of drilling and completion budgets, given the large aerial extent of economic acreage and stacked pay horizons, as featured in our E&P Positioning Report.
While capital aimed at the gas-focused regions of Appalachia, the Haynesville and Barnett has been fairly stable over time, capital has not always flowed to the Permian to the same degree as it does today. This can be seen in the chart below, which shows the distribution in D&C capital for US liquids-focused regions. In 2014, the same sample of companies sent just 29% of their US liquids focused D&C capital to the Permian.
The subsequent land rush to the Permian is well documented, but now that public E&Ps are more focused than ever before in the shale era on capital discipline, any increase in capital sent to the Permian comes at the expense of potential investment in another region.
Two regions most clearly affected by Permian exuberance are the Eagle Ford and Williston Basin. The stacked chart below shows the distribution of D&C capital for 26 E&Ps within our sample that had operations in the Eagle Ford at some point between 2015 and 2018. Each year includes the top ten most active public operators from that year, with the exception of Statoil.
Amongst all the companies sampled for this analysis, D&C capital to the Eagle Ford dropped by 67% from 2015 to 2016, and has been the slowest to recover of the five major oil regions, growing just 32% from 2016 to 2018. For the same operators, the Permian, meanwhile, lost just 26% of D&C capital in 2016, and has since more than doubled. In 2015 there were 26 companies in our sample with capex aimed at the Eagle Ford, with 46% of their capital allocated to the Eagle Ford. For 2018, those 26 companies have just 25% of their D&C capital allocated to the Eagle Ford, and 12 companies have either exited the Eagle Ford or have not allocated any capital to the Eagle Ford at all in 2018. The same group of companies is now sending 39% of their capex to the Permian.
A similar trend shows up in the Williston Basin as well. In 2015, 12 of the 50 E&Ps sampled sent $7.3 billion in D&C capital to the Williston, about 40% of their overall budgets, as shown in the stacked chart below. That D&C capital was more than halved in the following year, and has only risen by 57% since. There are now just eight E&Ps in the sample with capital headed to the Williston. Investment in the Permian from those 12 Williston operators has increased from 7% in 2015 to 31% in 2018.
While this hardly spells the end for these large producing regions, US shale capex is constantly in flux and more and more is finding its way to the Permian. How do we think these shifts in capital will impact the timing of US oil and gas production? What infrastructure constraints might cause these capital allocations to change during 2018? Find answers to these questions and many more in our U.S. Upstream Outlook .