High oil prices, capex, supply chain issues seen as hot topics for Q1 upstream calls

A slew of issues headlined by high oil prices, capital spending and production are likely to crop during US upstream operators' first-quarter conference calls, which may also touch on inflation, supply chain concerns and the pace of exits from Russian operations.

Whether oil prices currently around $100/b can coax upstream operators to further open their pocketbooks from roughly a 23% average increase in capex that they announced earlier this year will likely be a key question in Q1 calls which begin rolling out in late April through early May, analysts said.

Also likely discussed will be supply chain delays, which have made securing materials and labor difficult, causing inflationary pressures, Sami Yahya, senior energy analyst for S&P Global Commodity Insights, said.

Operators will almost certainly discuss what they are doing to offset some of the cost increases, such as efficiency gains and securing extended contracts with service providers, Yahya said.

"We estimate around 15% year-to-year cost increases, with most of the impact coming from fuel (diesel) and tubulars," he added. However, the 23% planned increase in capex should allow operators to both cover inflation "plus have room for some production growth."

S&P Global sees total US oil supply growing by 850,000 b/d, of which 700,000 b/d is onshore, to reach 12.6 million b/d in December 2022. That output is just below the record high of 12.8 million b/d reached in December 2019.

Supply from the Permian Basin in West Texas/New Mexico is set to expand by 550,000 b/d in 2022, reaching nearly 6 million b/d in December 2022, Reed Olmstead, executive director for North American upstream research, said at an S&P Global Commodity Insights webinar earlier this month.

'A constant temptation'

High oil prices may be a "constant temptation" since producers will be able to deliver both returns and growth at current price levels, according to Olmstead.

But most upstream analysts say they don't see E&Ps straying materially from the capital discipline that they developed over the last few years and especially took hold as the coronavirus pandemic struck in early 2020 and persisted through 2021.

And "with excess DUC inventories worked off ... [as well as] supply chain concerns and capital discipline, the potential for US production to surprise to the upside this year looks limited," said Jim Wicklund, managing director at boutique investment bank Stephens Inc.

Most public E&P spending in 2020-2021 was mainly to hold production steady in 2020-2021 after the pandemic torpedoed oil demand.

But private operators seem to be a wild card, accelerating their drilling activity and now represent around 60% of all rigs, versus 42% when the pandemic started, Yahya said.

Even as US President Joe Biden called for more oil and gas production to ease unprecedently high pump prices in light of the Russia-Ukraine war, "we have not seen much of a reaction from public operators that indicates they will increase supply," owing to the conflict, he added.

Not only would more oil and gas production require more rigs, fracturing crews, steel pipe, sand for well completions and labor that simply aren't available now, but scant capital is available to fund additional post-production downstream infrastructure such as pipelines and LNG export terminals, Scott Sheffield, CEO of Pioneer Natural Resources, said at an April 6 Congressional hearing on high fuel prices.

Output would lag 18-24 months

Procuring all the elements and performing the work would require 18-24 months before any "meaningful incremental production" could be added, Sheffield said at the during the US House Energy and Commerce Subcommittee on Oversight and Investigations hearing.

In addition, "we face a future oil price curve that will decline by $25 [per barrel] in the next five years," he said.

Also testifying at the hearing were CEOs of Chevron, ExxonMobil and several supersized independent producers who said they, like other fuel consumers, are also subject to market price volatility.

During Q1 calls operators may also address the growing concerns regarding natural gas takeaway, particularly in the Permian and specifically starting in 2023, Yahya said.

Natural gas prices are also up in recent months. For the week ended April 13, gas at Henry Hub averaged $6.39/MMBtu, up 63 cents on the week, while at Dominion South the price was $5.86/MMBtu, up 47 cents, S&P Global data shows.

While much spending this year is on oil plays, that production will also yield associated gas which has caused US gas production to rise in lockstep with oil.

Gross US production was 116 Bcf/d pre-pandemic and marketed production 102 Bcf/d, roughly on par with current levels, according to the US Energy Information Administration.