The Morning Note -- September 25, 2018

Tea leaves: everything suggests higher WTI prices by the end of the year. Newest sign: deepwater resurgence. And this, "Asia's oil market is torrid" due to Iran sanctions and mega-refineries. Of the six or seven Rigzone headline stories this morning, three of them spoke of higher oil prices and reasons why various analysts expect to see those higher prices.

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Back to the Bakken

Wells coming off the confidential list: none today or tomorrow.

Active rigs:

$72.50😄	9/25/2018	09/25/2017	09/25/2016	09/25/2015	09/25/2014
Active Rigs	64	58	33	71	192

RBN Energy: E&Ps grind out production growth through incremental CAPEX increases.

U.S. exploration and production companies (E&Ps) are generating such substantial output growth that the International Energy Agency (IEA) estimates their increase in 2018 liquids production could equal the entire growth in global demand. Remarkably, they’re accomplishing this with half the capital investment of 2014. The driver has been a shift to a manufacturing mode that has transformed the E&P industry as dramatically as Henry Ford’s moving assembly line changed the automobile industry in 1913.

Geophysical and technological innovations, such as multi-well pad drilling, have allowed the industry to double output per well bore at half the previous cost. With oil prices and margins rising, you’d think the E&P industry, which historically has invested like “there’s never too much of a good thing,” would be pouring every available dollar into drilling more and more wells. But that isn’t the case. Instead, mid-year 2018 guidance shows that producers have adopted the long-term investment strategies usually associated with integrated oil majors, plotting incremental increases in investment to methodically accelerate production growth to 2020 and beyond.

The U.S. E&P sector in the first half of 2018 benefitted from the good-times trifecta of higher oil prices, higher output, and lower costs. As a result, the 44 E&Ps we track reported $21 billion in pre-tax operating profits, up from $6.2 billion in the first six months of 2017, and over $50 billion in operating cash flow, up from $39 billion a year ago. Most notably, these companies are on pace to garner an astonishing $30 billion in free cash flow. Yet, in their financial reports for the first half of 2018, our group of 44 E&Ps boosted total 2018 capital spending by only $3.9 billion, or 5%, over their initial guidance to $68.1 billion, which is 10% higher than their 2017 investment. In today’s blog, we’re drilling down to examine capital investment by peer group and company and to chart the impact on their expected production growth.