American Oil and Gas Reporter - January 2020 - 30

Special Report: Outlook 2020
Year Of Transition,
U.S. Upstream Challenges
Ahead In 2020
By Bill Campbell
Exiting what can only be classified as a disappointing
year-end 2019, the outlook for the U.S. exploration, drilling
and production industry in 2020 is murky at best. Total
upstream capital expenditures fell last year and many analysts
foresee more of the same ahead.
Yet signs of an impending recovery are clearly evident. The
question is when.
In their 2020 Oil, Gas and Chemical Industry Outlook,
analysts at Deloitte observe, "Lower shale output along with
OPEC's quotas could bring the market in balance in 2020 and
act as a cushion against weakening prices."
Upstream expert Thomas Petrie, chairman of Petrie Partners
in Denver, characterizes 2018 and '19 as "years of headwinds."
But in 2020, he suggests, "We have a really good chance that
those headwinds turn into more sustainable evidence of
tailwinds. We could find this year to be more rewarding to upstream producers."
But unlike the historical norm, cautions James West, senior
managing director and partner at Evercore ISI, and head of
Evercore's oil service, equipment and drilling research, "better
for producers" doesn't promise an immediate turnaround in
drilling activity. A "new normal" exists in the U.S. oil patch.
"The oil and gas industry is at a crossroad," West said in announcing the release of Evercore's 2020 E&P Spending Outlook
on Dec. 12. "Investor demands for returns have turned off the
capital spigot for U.S. shales, the main driver of global oil
growth this past decade. At the same time, the oil price crash of
2015 cut nonshale E&P spending by almost 40%, and the
industry is barely off the budget bottom.
"A supply crunch looms," West warns. "But demand fears
keep oil prices at bay, (leaving) the U.S. land outlook challenged,
to say the least."
Evercore cites a paradigm shift among producing companies,
driven by investors' new emphasis on returns. West points out
that for the past decade, total shareholder return in the energy
sector stands at zero versus 290% for the S&P 500.
Praveen Narra, senior oil field service analyst at Raymond
James, observes that the E&P industry has underperformed the
broader S&P eight of the past 10 years-even in periods of
$100 oil.
The longstanding, singled-minded focus on growing production
is giving way to creating value through return on capital invested,
West says. Evercore's Spending Outlook notes its 2020 survey
finds a record 47% of respondents are focused on being free
cash flow positive this year compared with a prior four-year
average of 23%.
30 THE AMERICAN OIL & GAS REPORTER

Production Slowdown
And therein may lie the seeds of recovery.
"With the lowering activity and a plateauing of productivity,
we think U.S. supply growth is likely to slow pretty significantly
as we get into 2020 and '21," Narra reveals.
He references a Raymond James report released in September
that showed U.S. well productivity as measured by 30-day
initial production rates had increased only 2% for the first six
months of the year, after having grown 30% a year during the
previous eight years.
At that time, the Raymond James team said rising well productivity was being driven by longer laterals with higher
proppant loadings and increased fractures, i.e., the "bigger
hammer" approach. But the slowing well productivity observed
in first half 2019 "represents clear evidence that gains are
beginning to reach maximum limits and may even roll over in
the coming years," the team reasoned.
Raymond James still holds that view six months later, Narra
assures. "In fact, as people are going to more multiwell pad development and co-development, you already are seeing a little
step-back from that bigger hammer approach," he says.
The U.S. Energy Information Administration's December
Short Term Energy Outlook estimates 2019 U.S. crude oil production would average 1.26 million barrels a day more than in
2018 and would grow another 930,000 bbl/d this year. But
Narra says Raymond James believes U.S. production growth
will be only about 300,000 bbl/d.
"Exit-to-exit (year-end) growth was significantly slower in
2019 than it was in 2018," he points out.
Morgan Stanley corroborates that in a Dec. 11 report titled
Oil & Gas: Five Key Themes for 2020, observing that U.S.
shale-only production growth month-over-month declined from
145,000 bbl/d in 2018 to 107,000 bbl/d last year.
Observing that in November, U.S. shale experienced its
seventh sequential month of lower production growth on a
year-over-year (YoY) basis and 12th in the past 14 months,
Evercore's 2020 Spending Outlook opines, "The brutal one-two
combo of tier one acreage depletion and capex cuts likely will
take oil and liquids YoY growth in 2020 to a mere 500,000 and
200,000 bbl/d, respectively.
IHS Markit projects U.S. production growth this year of
440,000 bbl/d in a Dec. 12 release that calculated the base
decline rate for more than 150,000 producing Permian Basin
wells would reach 40% by year-end 2019, up from 34% in 2018.
Evercore's West says the key take-away from IHS's study is
that 84% of Permian Basin capital expenditures last year went
to holding production even. Without an increase in oil prices,
he says, that would grow to 86% this year and 100% in 2021.

American Oil and Gas Reporter - January 2020

Table of Contents for the Digital Edition of American Oil and Gas Reporter - January 2020