Second-quarter 2021 highlighted the iron will of US upstream producers that continued to rein in capital spending and output despite higher oil prices, reaping sizable cash flows with increasing givebacks to shareholders.
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Production growth in Q2 was predictably low, as many operators that had reduced capital budgets last year opted to maintain roughly similar 2021 spend levels while continuing to drive drilling and completion efficiencies. The result was flat to modest sequential output growth, although the growth stemmed mainly from low Q1 output from a brutal US winter storm in February.
"I would say the quarter was characterized by two words: 'outsized' and 'generous'," said Sami Yahya, an analyst for S&P Global Platts.
Yahya said Q2's higher commodity prices "clearly" increased operator confidence. "And they channeled that [grit] not toward growth but rather their balance sheets, as they reduced debt and also passed the windfall of a price rally to their investors."
WTI NYMEX crude oil prices averaged $66.17/b in Q2, compared to $58.31/b in Q1.
All other things being equal, most tight oil operators met or even slightly beat their Q2 production guidance and kept to spending guidance, fueled by continued gains in various performance efficiencies, Yahya said.
Q2 production mostly up sequentially
Moreover, E&P companies pledged discipline even as they conceded they may spend a bit more in the future as the market normalizes to pre-pandemic levels. Still, for the time being, a couple of E&Ps are still on the flat oil-production train, notably Marathon Oil. Diamondback Energy also said it will keep oil production flat at about 220,000 b/d "for the foreseeable future."
While Q2 talk about production growth was "cut from the same fabric of low- to mid-single digit rate" seen in prior quarters, operators did reveal what would compel them to weave in stronger growth strands and readjust capital allocation in 2022 and beyond, Yahya said.
"It is market fundamentals, not prices," he said. "Between the supply overhang from OPEC+ and the stifled demand in Asia due to the coronavirus pandemic, shale operators think the market right now isn't calling for their growth.
"Should demand return to pre-pandemic levels coupled with low global spare capacity and conducive storage inventories, only then may operators reassess their capex allocation and push for more modest growth, and they feel they can pivot to that strategy relatively quickly," Yahya added.
Several operators that had closed major acquisitions in early 202—such as ConocoPhillips which acquired Concho Resources; Pioneer Natural Resources which acquired Parsley Energy and DoublePoint Energy; and Devon Energy which acquired WPX Energy—saw benefits of those multibillion-dollar transactions in Q2: higher cash flows, cost savings, better operating efficiencies and richer inventory with more contiguous drilling targets.
Net debt down 5%
Debt paydowns were also a feature of Q2, particularly for companies with recent acquisitions. Occidental Petroleum, which made a mammoth purchase of Anadarko Petroleum for around $55 billion in 2019, now has a large debt overhang and launched a tender at end-Q2 that enabled a paydown $3 billion in July.
Net debt was reduced by an average of 5% quarter on quarter, with many operators accelerating their net debt reduction target timelines, Yahya said. In addition, several operators upped their dividends by anywhere from 10%-50%, with Pioneer Natural Resources lavishing its investors with the higher end of that range, Yahya added.
A few operators said they would add US rigs in H2 2021 to provide growth in their major plays for 2022. Hess Corp. plans to add a third rig in its Bakken Shale operation in North Dakota during September to reap cash flow and raise production there next year, as well as optimize infrastructure and reduce costs.
APA Corporation, formerly called Apache Corp, picked up a second Permian Basin rig in June.
Chevron plans to add one or two more rigs in the Permian to the five it is already has there, while Continental Resources is pondering a rig add in the Bakken and two in Oklahoma by year's end.
Industry observers widely expect E&P operators to loosen their purse strings a bit next year.
"With supportive commodity prices, strong E&P cash flows, and when larger operator budgets reset, we expect both North American drilling and completion activity will increase in 2022," Evercore ISI oilfield services analyst James West said in an Aug. 6 investor note.
West noted big US land driller Patterson-UTI's rig count average has now increased for three consecutive quarters, and he's forecasting an eight-rig jump in Q3,which would mark the first time the company will have over 80 rigs running since Q2 2020, he said.
Moreover, the recent stringent producer discipline forged during the pandemic's peak last year and was so evident in Q2 will to some extent iron out the price spikes and plummets of the last dozen or so years, KeyBanc analyst Leo Mariani said.
"If [volatility] occurs, it will be much shorter duration and there will be much smaller production growth in the US," Mariani said. "Most US operators are committed not to grow volumes meaningfully this year, and in 2022 initial signals are that they'll do their best to remain disciplined until there is a demand normalization back to pre-pandemic levels and getting OPEC+ spare capacity to a reasonable level."