US independents’ spending plans diverge

US upstream independents are split into two camps on their 2019 capital expenditure (capex) plans, with one raising budgets to ramp up activity and the other remaining restrained. But the industry as a whole is still focused on improving returns, paring debt and keeping costs in check.

In prior quarters, the lines were drawn more along companies' operations, with producers in the Permian basin generally taking similar calls driven largely by the basin's advantages and challenges. The divergence in strategy probably reflects what stage producers are in for restructuring operations in response to the oil price slump in 2014-16, while planning future growth projects.

Concho Resources, the top shale producer in the Permian basin straddling Texas and New Mexico, plans to increase its 2019 capex to $3.4bn-$3.6bn from $2.5bn-$2.6bn this year, in line with an expanded drilling plan after completing its acquisition of peer RSP Permian. Prior to the deal, its 2018 capex guidance was $1.9bn-$2.1bn. Concho has already upped its rig count to 34 from 31 in the third quarter, and plans to lift it to 38 by 2020. The bulk of the capex will go to large-scale projects with longer lateral wells, raising the average length of its wells by around a fifth to 9,700ft (2,960m). But the plan is still conservative as it is based on an oil price of $55-$60/bl, Concho says.

"Planning in this range allows us to prudently step up our [capex]," chief executive Tim Leach says. "Being a steady ship creates the highest efficiency."

Permian rival Occidental completed its restructuring that included asset sales of $2.6bn earlier this year. The firm expects output to grow by 5-8pc/yr by 2022 with capex of $5bn-$5.3bn/yr, compared with $5bn this year. Production gains will be driven largely by the Permian, where its fourth-quarter guidance of around 212,000 b/d of oil equivalent (boe/d) is up by 54pc on the year. As costs fall, Occidental expects to generate cash flow of $9bn-$9.5bn/yr by 2022 at a WTI price of $60/bl, compared with $8.5bn this year at $67.50/bl WTI. "We are very confident in our ability to achieve that with the assets we have," chief executive Vicki Hollub says. "We have more than exceeded our targets."

Peer prudence

Some of the leading independents outside the Permian are similarly prudent. ConocoPhillips will detail its 2019 capex guidance in December, but chief executive Ryan Lance says it will be in line with this year's $6.1bn. Output at the firm's three main shale operations — Eagle Ford in south Texas, the Bakken in North Dakota and the Delaware in Texas — grew by 48pc on the year to 313,000 boe/d in the third quarter and will help drive future growth. "We are not chasing higher prices by ramping up activity," Lance says. "We expect to close out 2018 on a strong note. We are building good momentum heading into 2019."

Apache also plans to hold its 2019 capex largely flat to this year, at $3bn, with efficiency and technology improvements driving output growth. The firm expects production next year to be at the upper end of a previous guidance of 410,000-440,000 boe/d, compared with 395,000 boe/d in 2018.

But EOG Resources is bucking the trend. It plans to raise its 2019 capex to $5.8bn-$6bn, compared with $5.4bn-5.8bn this year, despite overhauling its asset portfolio to wells that deliver a minimum 30pc rate of return at $40/bl and $2.50/mmcf. The higher spending is aimed at maintaining growth into 2019 given the lower breakeven prices. "We are positioning EOG to carry the operating efficiencies gained this year into 2019," chief executive Bill Thomas says.

Hess is also expected to increase spending to around $3bn/yr over 2019-25, from $2.1bn this year, shared equally between the firm's massive offshore Guyana project with ExxonMobil and its Bakken assets.