June 21, 2022

U.S. Oil Production and Capex Expected to Rise

by Tajinder Dhillon.

U.S. President Joe Biden has criticized oil majors for not stepping up to help combat record-high gasoline prices at the pump.  In his latest remark, he highlighted that many oil companies have made record levels of profit and according to Refinitiv I/B/E/S estimates, 2022 looks to be a banner year for the energy sector.

Exhibit 1 highlights the net profit margin for the S&P 500.  Energy is expected to post a record-high profit margin of 11.7% followed by 10.7% in 2023, both expected to be the highest margin in over a decade in large part to a sustainable sharp rise in oil prices.

Exhibit 1: Net Profit Margin

The President asked for oil companies to increase both drilling and refining capacity to increase supply of gasoline, diesel, and other refined fuels.  In this note, we focus on the drilling and in a follow-up post will shift our attention to refining capacity.

Looking at Refinitiv Datastream, we observe U.S. oil production to see if oil companies have been increasing production since the pandemic.  In exhibit 2, oil production has gradually increased since 2020 to a current level of 12.0 million barrels per day.

While encouraging, we also note that according to forecasts from the Energy Information Administration (EIA), it will be another year before oil supply reaches its pre-pandemic level of 13.0 million barrels (July 2023).

The latest data from Baker Hughes shows the oil rig count a 584, a week-over-week increase of just four rigs. Since the beginning of the year, the rig count has increased by 104 rigs but still far from its pre-pandemic high of 888 rigs in November 2018.

 Exhibit 2: U.S. Oil Production

Key Performance Indicator (KPI) for Energy Companies

Diving deeper into oil production, exhibit 3 displays the total production per day in barrels of oil equivalent (BOE) (i.e., oil, natural gas, liquified natural gas) on both a historical and forward-looking basis for S&P 500 energy constituents using Refinitiv Workspace.

Key Performance Indicators (KPIs) incorporate deep, industry-specific operating metrics and are available for 15 industries, across 250+ granular metrics.  For more information on Refinitiv I/B/E/S KPI’s click here.

Exhibit 3: Total Barrels of oil Equivalent Production

In the most recent earnings season quarter (22Q1), energy companies produced 13.7 million BOE which is up 5.1% on a year-over-year basis but down 2.2% on a quarter-over-quarter basis.

Coterra Energy Inc (CTRA.N) saw the largest YoY increase of 65.3% followed by Pioneer Natural Resources (PXD.N) (34.6%), and Diamondback Energy Inc (FANG.OQ) (24.1%).

Energy heavyweights including Exxon Mobil Inc (XOM.N), Chevron Corp (CVX.N), and Occidental Petroleum Corp (OXY.N) all saw declines this quarter of 3.0%, 2.0%, and 3.4% respectively.

At an aggregate level, analysts expect BOE production to increase throughout 2022 and into 2023.  On a YoY basis, BOE production is expected to increase by 3.6% in 2022 followed by 3.9% in 2023.

Capex Estimates Rising

We also look at capital expenditure estimates in exhibit 4 using Refinitiv Datastream.  Using Datastream Indices, we retrieve capex and revenue estimates for the U.S. energy market index which has 53 constituents.

On a forward 12-month basis, capital expenditures are forecasted at $105.0 billion, up 25.1% YoY.  This is the largest YoY increase since 2012.

Capex relative to forward sales continues to decline with a current reading of 5.8%.  This is in large part due to math effects with the denominator increasing at a substantially larger rate.  Forward 12-month revenue estimates are currently $1.8 trillion, an increase of 59.1% YoY, the largest since September 2008.

Exhibit 4: Energy Capex and Sales Estimates

  • Product Insight: To retrieve capital expenditure estimates for the U.S. Energy market, use mnemonic/datatype “ENEGYUS(DICX)”

While it appears that energy companies are expected to produce more oil over this year and next in addition to increasing capital expenditures, the question remains whether a) if it will be enough to balance oil markets and, b) if it is being done quickly enough to please political pressures.  In reality, oil production is a long-cycle business with long lead times which makes it difficult for oil producers to provide a timely response to the current situation.

In a follow-up post, we look at refining capacity, a key part of the supply chain which transforms a barrel of oil into refined fuel products such as gasoline.

Refinitiv Workspace is a complete solution for research and analytics. It places the most comprehensive market information, news, analytics and trading tools available into a desktop.

Refinitiv DatastreamFinancial time series database which allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.


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