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E&P Capex Budgets and the Impacts of Hedging

Entering 2020, BTU Analytics had forecast that a majority of independent E&Ps, especially those which are publicly traded, would plan to scale back activity in 2020 in the face of lower oil and gas pricing. As these E&Ps released their 2020 capex plans, that thesis generally rang true with drilling and completion budgets falling 14% from 2019 levels. However, the combined impacts to oil pricing from the global spread of coronavirus and the unraveling of the OPEC+ alliance will force oil-focused US independents to review their recently released 2020 budgets. In fact, as of the publishing of this report, ten E&Ps included in the analysis below (APA, DVN, FANG, MRO, NBL, OXY, OVV, PE, PDCE, and QEP) have decided to cut their budgets further.

As E&P budgets remain in flux, it is still worth contemplating the regions that may see the largest revision to the initially planned capex spend. As budgets are revised lower due to recent oil price shocks, how these E&Ps have managed price risk will be a key determinant in which producers may lower capex spend more than others. One way that operators typically manage price risk is through hedging. The analysis below details the drilling and completion budgets by basin for a group of E&Ps and discusses the potential for basin-level investment to fall further based on producer hedging levels throughout 2020.

As a bellwether for near-term activity, BTU Analytics looks to publicly traded independent E&Ps, who made up approximately 58% of horizontal drilling activity in 2019, as they release capital expenditure budgets for the upcoming year. The chart below details the year-over-year changes to drilling and completion budgets (a subset of the overall capital expenditure budget) by major shale basin for a group of public independents. It’s important to note that the data below is somewhat of a mixed bag as it is updated for the several producers who have already revised their respective budgets following the recent oil price volatility.


Based on the current public E&P announcements, budgeted D&C spend is set to decline by 22% from 2019 levels. Before recent oil price shocks, D&C spend was budgeted to fall by 14% from 2019 levels for the above subset of independent E&Ps. These declines, though, are not spread evenly across the US. Declines in budgeted Permian D&C spend, driven primarily by consolidation throughout 2019, are roughly in line with overall declines. However, Mid-Continent (primarily SCOOP/STACK) and the Powder River Basin so far are seeing the steepest declines in budgeted spend compared to 2019 as independents overwhelmingly shift capital away from the two regions in a low pricing environment.

Comparatively, budgeted D&C spend announced in the Eagle Ford and Bakken is currently expected to be roughly flat to 2019 levels. In the Eagle Ford, the flattening of D&C spend is largely driven by both EOG (+23%) and ConocoPhillips (+39%) increasing their expected spend in the area, while Chesapeake (-18%), Devon (-22%), Noble (-84%), Ovintiv (-52%), and SM Energy (-52%) all decreased their budgeted Eagle Ford spend. In the Bakken, a 25% increase in Continental’s D&C budget in the Bakken as it shifts activity away from Oklahoma was the primary offset to declines in budgeted spending from ConocoPhillips (-16%), EOG (-45%), Oasis (-15%), and Whiting (-13%). As of this report’s publishing, EOG, ConocoPhillips, and Continental have not revised their 2020 budgets.

However, as several companies have already revised their capex budgets lower in response to rapid deterioration in the global oil market, BTU Analytics expects more to follow. To consider where those revisions may be most drastic, it is important to factor in which operators may be protected from this downward price pressure in the near term. The chart below details a group of oil-focused operators and the level of expected 2020 production that has downward price protection, compared to the level of 2019 production that those producers had hedged at the same point last year. In general, these producers are much more hedged this year than they were at the same time last year. While there are many factors to consider when adjusting drilling and completion activity, like breakevens and debt burden, producers that have less downward price protection may be more price sensitive and more likely to revise budgets when pricing is low. In fact, of the companies highlighted in the chart below, several companies with comparatively lower hedging levels on 2020 production have already released new spending guidance, such as Apache, Devon, Marathon, and PDC.

With lower hedging levels making companies more sensitive to changes in pricing, other companies that could potentially announce significant reductions in 2020 drilling and completion spending could be Continental, EOG, Whiting, and Cimarex. Two of those companies, Continental and Whiting, are key operators in the Bakken and could drive the expected activity there significantly lower if they decide to lower capex spend. While currently announced Bakken budgeted D&C spend is flat to 2019 levels, BTU’s production forecasts in the region currently incorporate anticipated reductions to D&C budgets.

Similarly in the Eagle Ford, anticipated reductions to D&C budgets are driving BTU’s production forecast in 2020. EOG, which represents a third of the budgeted D&C spend in the Eagle Ford for the companies highlighted above, is reportedly finalizing plans around its budgeted activity. Given its challenged financial outlook, Chesapeake could also cut D&C spending beyond the 17% drop from 2019 that is already planned.

As BTU Analytics anticipates oil-focused independents to materially revise their capital expenditure budgets for 2020, current forecasts reflect how those expected changes impact overall production levels. As the situation remains dynamic, BTU Analytics will continue to diligently track how producers’ plans for 2020 activity compare to current expectations. The table below details the company-specific hedging and North America D&C budgets for 2020, as well as the date which the data was last updated.


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Joe Warner is a Senior Energy Analyst at BTU Analytics, a FactSet Company. He focuses primarily on power market data and analysis including capacity, generation, and emissions within ISOs and utility areas across the US. Prior to joining BTU Analytics, he worked on income tax compliance and consulting for private equity-backed upstream oil and gas investment partnerships. Joe is a licensed CPA (inactive) in Colorado and holds a B.S. in Accounting and Financial Management with a minor in Economics from the University of Colorado Denver.

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