More than 60% of oil and gas company executives surveyed by the Federal Reserve Bank of Dallas say they plan to increase their capital spending in 2023 versus last year while an even greater number expect input costs to rise further this year.
Researchers at the Dallas Fed last month asked leaders at 95 exploration and production companies as well as 53 oil and gas support services firms for details around their capex forecasts as an appendix to their regular survey of the energy industry. The findings suggest that there is still much optimism in Texas despite signs that the US economy is slowing–a dynamic reflected in the Dallas Fed’s business activity index, which retreated from the third quarter but remained solidly in positive territory.
Asked about capex plans, one in four respondents to the Fed’s poll said they plan a significant increase while another 39% said they will increase spending slightly. Only 14% said they will cut back from their outlays of 2022. Among service firms, the number projecting spending drops was slightly higher than for exploration and production (E&P) companies.
Helping support spending plans is a firm expectation that prices will remain favorable: 73% of survey respondents said they are using a West Texas Intermediate price between $70 and $85 per barrel in their spending calculations, with the average being $73 (versus $64 in 2022) and the median being $75.
Firm prices also will help companies continue to work through the effects of inflation and, relatedly, a tight supply chain. Those two factors were cited by 32% of E&P firms as the biggest drags on production growth. Maturing asset bases rank second as a drag, with 27% of respondents naming them. In all, 58% of respondents expect slight increases in what they'll pay for key inputs while another 10% said those increase will be substantial.
“Supply delivery times are difficult,” one survey respondent commented. “Inflation affecting operating expenses (wages and salaries) is an issue affecting our business. Also, pending state and federal regulations are impacting operational expenses.”
The inflation and supply chain sentiments echo commentary Oil & Gas Journal compiled from the third-quarter conference calls of a group of 20 E&P companies, service firms and refiners: Out of a total of 20 comments specifically about inflation or supply chains, none were positive and only one–“We don't expect, or at least at this point, expect that it would be a long-term inflationary period” by Occidental Petroleum’s Vicky Hollub—could be considered neutral.
Ballpark estimates of double-digit increases, several closer to 20% than 10%, and words and phrases such as “persistent” or “incredibly challenging” were far more the norm. Several executive teams told analysts and investors they weren’t yet comfortable prognosticating about input prices and spending plans but would instead build in some flexibility as they continue to seek a balance between production growth, capex/cost controls and capital allocation more broadly. That approach was embodied by Ring Energy Inc. chief financial officer Travis Thomas.
“All projects and estimates are based on assumed WTI oil price of $75 to $90 per barrel in Henry Hub natural gas prices of $5 to $6 per Mcf,” Thomas said on the company’s third-quarter 2022 call. “If prices were to pull back materially, we have the flexibility to reduce capital spending as necessary.”