According to the U.S. Energy Information Administration website news article published on April 26, 2023:
U.S. oil producers maintain shareholder distributions as cost inflation remains an issue
In the fourth quarter of 2022 (4Q22), 48 publicly traded U.S. exploration and production (E&P) companies reported lower cash from operations due to decreased crude oil prices. Despite this decline in revenues, shareholder distributions—which we define as the sum of dividends and share repurchases—increased in 4Q22 and remain well above their historical average. Based on E&P company presentations and survey data, supply chain constraints appear to be easing, but cost inflation remains an issue. Our analysis indicates capital expenditure for these E&P companies will continue to increase in 2023.
We base our analysis on the published financial reports of 48 publicly traded oil companies that produce most of their crude oil in the United States. As a result, our observations do not represent the entire sector as we exclude private companies, which do not publish financial reports. These 48 publicly traded companies collectively produced 35% (about 4.3 million barrels per day) of all crude oil produced in the United States in 4Q22.
The West Texas Intermediate (WTI) crude oil price averaged $82.69 per barrel (b) in 4Q22, a 7% ($5.42/b) increase compared with 4Q21 and an 11% ($10.38/b) decrease compared with 3Q22. Cash from operations for the E&P companies increased 23% ($6.5 billion) from 4Q21 to $35.0 billion in 4Q22 and decreased 20% ($8.5 billion) from 3Q22 (Figure 1). These companies produced 8% (325,000 b/d) more crude oil in 4Q22 than in 4Q21 and 2% (96,000 b/d) more than in 3Q22. Compared with pre-pandemic levels, production in 4Q22 was 2% (81,000 b/d) lower than in 1Q20. Capital expenditure increased 6% ($1.0 billion) compared with 4Q21 to $16.5 billion and decreased 12% ($2.2 billion) compared with 3Q22. Capital expenditure in 4Q22 was about the same in nominal terms as in 4Q19, when WTI prices averaged $57/b. However, recent cost inflation suggests more capital expenditure spending would be needed today to support similar levels of production compared with past years.
Distributions to shareholders as share repurchases and dividends increased to $18.9 billion in 4Q22, the most in the past five years (Figure 2). The E&P companies spent $10.7 billion on share repurchases and $8.2 billion on dividends. Shareholder distributions as a percentage of cash from operations increased to 54% in 4Q22, meaning more cash from operations went to shareholder distributions than to any other use, including capital expenditure. About 40% of the share repurchases, however, were the result of a one-time $4.3 billion acquisition of common stock by Continental Resources, Inc., as part of plans to take the company private. Compared with pre-pandemic levels (between 1Q17 and 1Q20), when shareholder distributions averaged 22% of cash from operations, E&P companies have significantly increased shareholder distributions in recent quarters.
Although production expenses for the E&P companies continued to decline from recent highs, costs remain elevated compared with pre-pandemic levels. Production expenses such as the cost of goods sold, operating expenses, and production taxes totaled $28.26 per barrel of oil equivalent (BOE) in 4Q22 (Figure 3). Compared with pre-pandemic levels (between 1Q17 and 1Q20), when production expenses averaged $17.69/BOE, production expenses for the E&P companies in 2022 have been 71% ($12.56/BOE) higher on average. Cost of goods sold, which includes the cost of materials and labor directly used in production, represents the largest increase; the reported average for 2022 was 128% ($9.43/BOE) higher than the pre-pandemic average. Production taxes also more than doubled in 2022 compared with the pre-pandemic average, increasing 104% ($1.93/BOE), but they represent a smaller portion of overall production expenses. We expected production taxes to rise in 2022 because they are typically tied to crude oil prices, which increased to nine-year highs. Operating expenses, which are lifting costs and storage costs not covered by the cost of goods sold, remain much closer to the pre-pandemic average, increasing only 14% ($1.21/BOE) on average in 2022.
Data from the quarterly Dallas Fed Energy Survey suggest cost inflation remains a considerable issue for E&P companies. When asked about issues that will have the most influence on profitability in 2023, 30% of respondents ranked cost inflation as the most influential on profitability, and another 30% ranked the health of the global economy as the most influential (Figure 4). Notably only 3% of respondents ranked supply-chain issues as the most influential on profitability. Furthermore, the Dallas Fed’s supplier delivery time index, which measures the time it takes for E&P firms to receive materials and equipment, was negative in 1Q23 for the first time since 4Q20. A value below zero means more companies saw decreases in delivery times than those facing increases. Together, these two data points signal that supply-chain constraints are easing. However, elevated costs and concerns about the economy continue to weigh on the outlooks of E&P companies and could lead to slower production growth in 2023.
Publicly traded companies often publish plans for their operations and spending, called company guidance, to help investors analyze company performance. Companies routinely release this information in corporate presentations, press releases, and official filings with the U.S. Securities and Exchange Commission. An analysis of company guidance for 42 E&P companies with guidance available for 2023 shows that these companies currently plan to increase capital expenditure by 5% compared with 2022 (Figure 5). Actual spending usually exceeds guidance because companies may not include asset acquisition spending in their guidance, but such transactions regularly occur each year. Furthermore, recent cost inflation has likely contributed to higher actual spending as E&P companies adjust to the faster pace of cost increases. If actual spending in 2023 matches the average deviation from guidance over the past two years, capital expenditure by the E&P companies could increase as much as 27% in 2023 compared with 2022 and 9% compared with 2019.
For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.
