11.8.20 DEP Industry Observations: E&P Capital Spending Thoughts; Land Rig Count Rises Again

Now that we are essentially through Q3 earnings season, this weekend we reviewed E&P commentary regarding near-term capital spending and activity trends.  Where possible, we highlight Q4 and preliminary 2021 guidance as well as convey go-forward activity assumptions as provided.  As expected, E&P capital spending is still moving higher with Q4’20 capex likely up 25-30% q/q.  Higher spending should not come as a surprise given the U.S. land rig count is already up ~14% since the end of Q3 and should rise ~15-20% on a q/q basis.  The key question is what looms beyond Q4.

At this point, there is limited formal 2021 guidance as budget season is still underway.  Thankfully, some companies have provided a preliminary view while in other cases, we are left to make some general assumptions.  If one is willing to embrace our rather liberal view for estimating 2021 capex, which we’ll explain momentarily, the outcome suggests spending for our group of ~30 companies could be up ~10-15% relative to the 2H’20 annualized spending levels.  In other words, we believe activity grinds higher next year, but this belief is predicated on a ~$40+ oil environment.  As for why our forecast requires some degree of reader leniency, we acknowledge that we are using the 2020 expected spend as our 2021 proxy for those companies who have not yet expressed a 2021 view (or if they did, we missed it).

We’ll test our activity/spending theory over the next two weeks as we hit the road once again.  Tomorrow, we fly to Williston where we’ll kick off a Williston/Minot/Gillette/Denver tour.  The following week (11/16 to 11/20), we drive back to Midland for another four day Permian tour.  As for social activities, we’ll host a reception in Williston tomorrow night as well as a reception in Midland on 11/17.  Thanks to CP Energy Sand Commander and ASAP Industries for serving as co-host/sponsor at the Williston/Midland events, respectively.

New Team Additions.  We are pleased to announce Sean Mitchell and Mary Helen Norman both joined Daniel Energy Partners this past week.  Sean will serve as a Managing Partner of the firm alongside Bill Austin and John Daniel.  He will lead our institutional sales effort and will assist with corporate development activities.  Previously, Sean worked for nearly 20 years at Simmons Energy as an energy specialist on the firm’s institutional sales desk.  Mary Helen will serve as Director of Corporate Development with a primary focus on corporate sales and managing the growing list of DEP industry events.   Previously, Mary Helen served as a Business Development Executive with Insgroup, Inc.  Both Sean and Mary Helen are UT Austin grads which means we’ll probably do a few UT-related tailgate parties.

U.S. Land Rig Count.  The BKR U.S. land rig count rose another four rigs to 286 rigs.  The count is now up 55 rigs (+24%) from the August trough.  This week’s gains came largely in the Permian (+5 rigs w/w).

E&P Conference Call Anecdotes.  Below we provide anecdotes for a basket of E&P companies.  We are still grinding through transcripts, but the overarching theme is pretty consistent.  First, activity levels are moving higher. Simple math suggests Q4 E&P capex will be up q/q, probably somewhere in the range of +25% q/q. Second, few companies have announced their formal 2021 budgets, but some have provided a 2021 framework.  If we assume this framework plays out, the potential spending levels could represent a ~10-15% increase vs. the Q3/Q4 2020 annualized run-rate.  This is the important metric, not the y/y change in budgets as 2020 spending had an abnormally high Q1 spend.

One theory which could have some upside (albeit small) to drilling and completion capital spending next year is the likelihood that E&P 2021 capex dollars for midstream and infrastructure decline y/y.  In several cases, midstream and infrastructure capex spend are a decent portion of one’s overall budget (~10%+).  However, if the goal of the industry is to maintain flattish production vis-à-vis the Q4 exit rate, it makes us wonder just how much infrastructure spending will be needed next year.  Case in point, FANG noted its midstream/infrastructure spend could be down as much as 50% in 2021.  To put this in context, for FANG the spend associated with midstream/infrastructure will likely total ~$250M in 2020.  Admittedly, it may be too early to say if this reduced spend will show up in higher D&C spending, but it’s something to consider, not just for FANG, but for all E&P’s.  Also worth noting, for those E&P’s who have discussed their preliminary 2021 capex spend, the guidance/commentary is often an overall number, not a formal breakdown of the spend specifics.  Consequently, we are left to make a few guesses.

Q3 E&P Activity Observations.

• FANG:  Running 5 rigs and we believe 5 frac crews.
• PXD: Running 8 rigs and 4 frac crews.  Will add rigs in late Q4.
• MRO:  Running 3 rigs and one crew in the Eagle Ford.  Running 3 rigs and one crew in the Bakken.
• CDEV:  Resumed drilling and completion activity.  Running 1 rig, but noted it will run 2 rigs in 2021.
• ESTE: Resumed completion activity in Q4.
• WPX: Add two crews to the Permian and one crew to the Permian.
• APA: Reactivated two Permian crews to work down DUC inventory.
• HES: Still running one rig.  Does not expect to have high DUC inventory.
• SBOW: Resumed drilling in October and resumed completion activity in Q3.  Appears completion activity will continue into Q1; DUC drawdowns.
• CRK: Running 6 rigs and 3 frac crews.  Will add a 7^th rig in 2H’21.
• PDCE: Resumed completion activity in September.  Will run one rig and one frac crew in the Wattenberg in Q4.  Nothing in the Permian.
• XEC:  Running 4 rigs and 2 crews in the Permian.  Nothing in the Mid-Con.   XEC will drop one crew in December.
• LPI: Running one rig and one frac crew in Howard County.
• OVV: Averaged 3 rigs in the Permian and 2 rigs in the Mid-Con.  2021 plan calls for 3-4 Permian rigs and 2-3 Mid-Con rigs.
• QEP:  Running 2 rigs in the Permian and nothing in Williston.  Resumed Permian completion activity in October.
• EQT: Will average 2-3 HZ rigs in 2020 and 2-3 frac crews in 2020.
• CPE: Resumed drilling with three rigs.  Running one frac crew.  Had picked up a 2^nd crew in Q3, but it has since been released.
• COG: Running 2 rigs and one frac crew.  Had been operating two crews.
• RRC: Will add one rig and one frac crew in Q4.
• CNX: Running one rig and one frac crew.
• SWN: Averaged 3 rigs and 3 frac crews in Q3.
• AR: Running one rig and one frac crew.
• DVN:  Ran 9 rigs and 3 frac crews in Q3.
• CLR: Running two rigs in the Bakken and 3 in Oklahoma.  CLR will add a frac crew in the Bakken in November and two additional crews in early December.
• BCEI: Will resume completion activity in January as it works through its DUC balances.
• EOG: IR slides indicate an average of ~14 rigs in 2020 and ~8 frac crews in 2020.
• NFG: Running 1 rig, but will add a 2^nd rig in early 2021.

Q3 E&P Capex Commentary:  Apologies for the wordiness below, but we try to keep a relatively consistent description methodology.  Just trying to show how we arrive at a potential Q4 spend.

• FANG: Spent $281M in Q3 with YTD spend at $1,633M.  2020 Budget at midpoint is $1.85B, implying ~$220M in Q4, thus down slightly q/q
• PXD:  Spent $291M in Q3 with YTD spend at $1.15B.  2020 Budget at midpoint is $1.5B, implying ~$350M in Q4, thus up q/q.
• MRO: Spent $176M in Q3 with YTD spend at $892M.  2020 Budget equal to $1.2B, implying ~$300M in Q4, thus up q/q.
• CDEV: Spent $22M in Q3 with YTD spend at $225M.  2020 Budget at $240-$265M, implying ~$30M in Q4, thus up q/q.
• WPX:  Spent $256M in Q3 with YTD spend at $757M.  2020 Budget at midpoint is $1.05B, implying ~$300M could be spent in Q4, thus up q/q.
• ESTE:  Spent $1.4M in Q3 with YTD spend at $46M.  2020 Budget at midpoint is $65M, implying ~$20M could be spent in Q4, thus up q/q.
• APA:  Spent $141M in Q3 with YTD spend at $799M.  2020 Budget reduced to $1.0B, implying ~$200M could be spent in Q4, thus up q/q.  Most of the spend is International.
• SBOW: Spent $20M in Q3 with YTD spend at $76M.  2020 Budget at $95-$100M, implying ~$25M could be spent in Q4, thus up q/q.
• CRK: Spent $110M in Q3 with YTD spend at $316M.  Q4 capex guided to $150-$175M, thus up q/q.
• PDCE:  Spent $35M in Q3 with YTD spend at $315M.  Q4 capex guided to $110M, thus up q/q.
• XEC: Spent $83M in Q3 with YTD spend at $441M.  2020 Budget is $600M, implying $159M in Q4, thus up q/q.
• LPI: Spent $43M in Q3 with YTD spend at $276M.  2020 Budget is $345M at the mid-point, implying ~$70M could be spent in Q4, thus up q/q.
• OVV: Spent $351M in Q3 with Q4 guidance of ~$400M of capex, thus up q/q.
• COP: Spent ~$700M in Q3 (ex. Acquisitions) with YTD spend at ~$3.2B (ex. Acquisitions).  2020 Budget is ~$4.3B, implying ~$1.1B in Q4 spend, up q/q.
• QEP: Spent $38M in Q3 with YTD spend at $285M.  2020 Budget is $340M at the mid-point, implying ~$65M could be spent in Q4, thus up q/q.
• EQT: Spent $248M in Q3 with YTD spend at $813M.  2020 Budget reduced by $50M to $1.075B at midpoint, implying ~$262M could be spent in Q4, flat.
• CPE: Spent $38M in Q3 with YTD spend at $401M.  2020 Budget is $505M at the mid-point, implying ~$105M could be spent in Q4, thus up q/q.
• COG: Spent $128M in Q3 with YTD spend at $464M.  2020 Budget is $575M, implying $111M could be spent in Q4, thus down q/q.
• RRC: Spent $64M in Q3 with YTD spend at $298M.  2020 Budget is $415M (or less), implying potentially $117M could be spent in Q4, up q/q.
• CNX: Spent $108M in Q3 with YTD spend at $395M.  2020 Budget is $505M at mid-point, implying ~$110M in Q4 capex, flat q/q.
• SWN: Spent $223M in Q3 with YTD spend at $705M.  2020 Budget is $915M, implying ~$210M in Q4 capex, down slightly q/q.
• AR. D&C capex was $161M in Q3 with YTD D&C spend at $650M.  2020 D&C budget is $750M, implying ~$100M in Q4 capex, down q/q.
• DVN:  Spent $195M in Q3 with YTD spend at $789M.  2020 capex budget is $950-$990M, implying ~$180M in Q4 capex, down slightly q/q.
• CLR: Spent $149M in Q3 with YTD spend at $991M.  2020 capex budget is $1.2B, implying ~$200M in Q4 capex.
• BCEI: Spent $2M in Q3 with YTD spend at $65M.  2020 capex budget is $60M to $70M, thus Q4 likely flat.
• EOG:  Spent $646M in Q3.  2020 capex budget is $3.4B to $3.6B with Q4 guidance at $830M to $930M.
• WLL:  2020 budget is a range of $213m to $218M with Q4 capex at $27M.  Q3 actual capex not in the press release.
• NFG:  Not sure about our math on this one, but it looks like the E&P segment spent ~$90M this quarter while the FY’20 budget was $384M (fiscal year ends 9/30).
• SM: 2020 Budget = $605M-$610M with Q4 spend expected to be $205M, up from $121M in Q3.

2021 Capex Observations:  Very few formal 2021 budgets were presented this earnings season; however, a number of E&P’s did provide a 2021 framework.  As one considers the 2021 capex framework, we remind readers to compare the preliminary spend to the Q3/Q4 annualized run rate.  The y/y comparisons are a bit misleading given how much capex was spent by the E&P industry in Q1’20.  Also, comparing the 2021 spend to today’s annualized rates of spend provides a better road-map to where we may be headed.  Finally, most companies presented the 2021 plan with an underlying view of WTI prices at ~$40/bbl.  Should we revert back to the mid-$30’s, the preliminary ranges offered during Q3 earnings season will most likely be trimmed.  Finally, we would assume most companies will have budgets weighted towards 1H’21 thus Q1, we believe, will be busier than Q4.  Frankly, if we were an E&P, we would want to go to work early in the year while service costs are still low and then hope commodity prices rally later in the year.

• FANG:  Likely 25-35% less than 2020.  Our back-of-the envelope math implies a 2021 D&C budget of ~$1.1B.  Company spent $219M on D&C in Q3, suggesting 2021 activity could be higher than FANG’s Q3 levels.
• PXD:  No specific budget due to pending PE acquisition.  The company’s reinvestment rate will, however, decline to 65-75% vs. 70-80%.
• MRO: Presented a maintenance scenario budget of $1.0B, which would be down ~$200M vs. 2020, but would be essentially flat with the 2H’20 run-rate.
• CDEV: No formal guidance, but will target a maintenance program in order to hold exit rate production flat.
• APA:  Anticipates upstream capital budget of $1B or less; consistent with 2020.  Plan based on $40 WTI and HH at $2.75.
• SBOW:  Anticipates capex consistent with 2020 levels.
• CRK: D&C budget estimated at $525-$575M.  Expects to drill 70 gross wells in 2021 vs.. 53 wells in 2020.
• PDCE: Budget at $500-$600M vs. the 2020 Budget at $500-$550M.  Keep in mind the Q4’20 run-rate spend is $440M, thus a potential 20% increase vis-à-vis Q4 levels in 2021.
• XEC: Capex targeted at 70-80% of cash flow, but no specific budget disclosed.
• LPI:  2021 plan appears flat y/y at ~$330-350M; however, the capex plan would represent a ~20% increase from potential Q4’20 annualized capex.
• OVV: Maintenance plan of $1.5B, which would represent a slight decrease from the Q4’20 run rate.
• COP:  Stated that COP spend on a stand-alone basis would be similar to 2020.  Implies flattish relative to our estimated Q4’20 spend.
• QEP: 2021 plan of $300M.  The Q4’20 run-rate of ~$160M suggests a healthy increase relative to expected Q4’20 activity levels.  Of note, 65% of 2021 budget expected to be spent in 1H’21.
• CPE:  The operational maintenance budget is $375M-$400M which is less than the implied Q4’20 run-rate of $420M.
• COG:  Preliminary 2021 capex = $530-$540M vs. 2020 budget of $575M.
• CNX:  Preliminary 2021 capex = $440M, essentially flat with the ~$110M expected Q4 spend.  CNX noted it will likely run one rig and one crew for some time.
• AR: 2021 maintenance capex budget = $580M.  This will be an increase from the expected Q4’20 spend of $100M (or $400 annually).
• DVN/WPX: The combined maintenance plan is $1.7B.  DVN stand-alone in 2020 is ~$950-$990M while WPX is ~$1.05B, thus combined spending moves lower by ~$300Mish.
• CLR:  Preliminary 2021 budget = $1.2B. to $1.3B.  The Q4’20 run rate is roughly $800-$850M, thus ’21 capex is potentially up 50% from the current run rate.
• EOG: Maintenance budget is $3.4B which can be funded at $36 WTI.  This compares to the 2020 budget of $3.5B using the mid-point of guidance.
• WLL:  Expects to hold 2021 flat with 2020.  Implies capex in the $215M range.  Q4’20 capex = $27M, thus 2021 plan is almost double the Q4 run-rate.
• NFG: Will spend $350-$390M in FY’21 vs. $384M in FY’20.  Looks like NFG spent ~$90M in the September quarter, thus FY’21 is flat-to-slightly up vs. the September quarterly run-rate.
• SM: Expects a 10% increase y/y in 2021.  Implies ~$660Mish.

2020 Midstream and Infrastructure (“M&I”) Capex.  A very small sample, but just an indication of M&I spend relative to one’s budget.  When companies announce their capex range, we wonder if the 2021 capex range implies less M&I spend.  If so and assuming all else is equal, this would suggest an upwards spend on D&C capex.  When the OFS market is as bad as it is, we will look for any possible glimmer of hope.

• FANG = $235-270M or ~13% of the 2020 budget ($1.8-$1.9B).
• CDEV = $40-$45M or ~17% of the 2020 budget ($240-$265M)
• XEC = $40M or ~7% of the 2020 budget ($600M)….of note, there is ~$130M of “Other” capex.  Not sure what this is yet.
• ESTE = $5M or ~8% of the 2020 budget ($65-$70M).
• CNX = $130-$140M or ~26% of the 2020 budget ($495-$515M).
• EOG = ~$350M for Facilities or ~10% of the 2020 budget.

E&P Capex Table:  The table below provides an estimate for Q4 capex as well as a preliminary estimate on 2021 spending.  This represents either company guidance/commentary or DEP estimates.