Increasing capex and rig counts are expected to drive production growth of 5% in 2017 as measured across 40 U.S.-focused exploration and production (E&P) companies, according to Fitch Ratings. Total drilling and completion spending is also expected to increase approximately 58%.
This marks the first time US E&P budgets are expanding since the downturn began in 2014, largely due to an improved oil & gas price outlook. Capital allocation is expected to be weighted toward the highest return shale plays with growth potential such as the Permian, Eagle Ford, STACK, Haynesville and Marcellus basins.
Growing production, higher hydrocarbon pricing and leaner cost structures should lead to increased EBITDA and cash flows, bringing leverage metrics closer to Fitch’s mid-cycle levels. This is reflected in the gradual shift in more than one-half of Fitch publically-rated U.S. E&P companies’ Rating Outlooks to Stable from Negative during first-quarter 2017.
Fitch’s sample suggests average US Lower 48 States (L48) land rig counts will increase 60%-65% year over year, with the pace of rig additions moderating following first-quarter 2017. This translates into a US L48 land rig count averaging around 800 rigs in 2017, with rig counts growing to about 850-875 rigs by year-end 2017.
Fitch believes the rate of US rig count growth in future years will be much more limited. This is due to the likelihood of E&Ps continuing to align capital spending with near-term cash flows and realizing rig efficiency gains, such as longer laterals, shorter spud-to-release times and improved drill bit placement, reducing the need for additional rigs.
In 2017, average production across the sample is expected to rise 5%, with liquids-focused companies exhibiting the greatest increase. Given the lag between capital spending and production growth, 2017 activity is positioning E&Ps for continued growth in 2018. Increased allocation of capital toward production, instead of testing and delineation and continued efficiency gains, are also expected to contribute to production growth.
Source: Fitch Ratings