Dallas Fed President, Robert Kaplan, on economic conditions, here…
“In this context, Dallas Fed economists expect U.S. crude oil production growth of approximately 0.4 mb/d in 2020.[18] This compares with production growth of 2.0 mb/d in 2018 and 0.9 mb/d in 2019.[19] These forecasts assume West Texas Intermediate oil prices stay in the range of approximately $50 to $60 per barrel.
This expected decline in U.S. production growth is influenced by weaker global demand growth and is also heavily influenced by a dramatic increase in pressure from capital providers to see “discipline” in capital allocation from energy and production firms. In practice, this means that capital expenditures for drilling activity will have to be funded by internal cash flow versus debt issuance. This is a fairly significant change from historic practice. It should be noted that shale projects are more “short-cycle” investments than typical conventional projects—they can be drilled and brought onstream very quickly and, on average, for approximately $6 million to $8 million per well. However, as output of wells tends to decline rapidly in the first few years of production, producers must continuously invest in order to maintain overall production levels.
As a result of these developments, our Dallas Fed oil industry contacts have indicated to us that they expect capital spending in the U.S. oil and gas sector could be down by as much as 10 to 15 percent in 2020. This reduction in capital spending is likely to have a substantial impact on energy service companies. Several companies have already announced restructurings, charge-offs and layoffs. In light of this, we would expect that 2020 will be a year of restructurings, consolidation where possible, and general belt tightening.”
Leave a Reply