What a difference a year makes. At this time last year, shale drillers were focused on one thing: survival. Many were cutting spending so deeply that they wouldn't be able to drill enough new wells to prevent dramatic production declines. However, with a more balanced oil market in 2017, which has provided some stability to oil prices, drillers are boosting their budgets in dramatic fashion. According to an analysis by Wood Mackenzie, drillers in the U.S. plan to spend $15 billion more this year, a staggering 60% hike from last year.
What goes down...
One of the poster children for the oil bust was Continental Resources (CLR +0.00%). Widely credited with discovering the keys to unlocking the oil riches in the Bakken shale of North Dakota, Continental Resources fell on hard times last year due to slumping oil prices and a balance sheet loaded with debt after years of outspending cash flow to increase its oil production. As a result, the company initially slashed its investment spending 66% in 2016 to a mere $920 million, which would allow it to live within projected cash flow given where oil was at the time. Unfortunately, that capital wouldn't come close to the amount needed to maintain its output, which was expected to fall from about 215,000 barrels of oil equivalent per day (BOE/d) in the first quarter to about 185,000 BOE/d by year-end.
Image source: Getty Images.
Fellow Bakken shale peer Whiting Petroleum (WLL +0.00%) also had no choice but to dramatically reduce spending last year to live within cash flow as it worked to reduce its overleveraged balance sheet. That situation forced the company to slash capital expenditures by 80% initially to just $500 million. At that investment level, production would fall to an average of about 133,000 BOE/d, which represented a dramatic drop from 2015's average of 163,200 BOE/d, though some of that decline was the result of asset sales used to pay off debt.
Balance sheet-challenged drillers weren't the only ones making dramatic cuts last year. Top-tier shale driller Devon Energy (DVN 1.34%) also took extreme precautions to start 2016, slashing spending 75% below 2015's level to a range of $900 million to $1.1 billion, which was expected to result in a 6% drop in production. Furthermore, Devon made the protection of its balance sheet the top priority, which led it to slash its dividend and put a plan into action to sell between $2 billion to $3 billion in assets to bolster its balance sheet just in case.
Is now coming back up
Shale drillers, however, are singing a different tune in 2017. Thanks to a combination of higher oil prices, efficiency gains, cost reductions, and balance sheet improvements, most shale drillers plan stunning spending increases this year. Continental Resources, for example, plans to spend $1.95 billion this year, which is up 77% from the $1.1 billion it ended up spending last year after hiking its budget as a result of higher oil prices. That's enough capital to accelerate output growth over the course of the year, with the company anticipating that it will end this year producing roughly 255,000 BOE/d, which is up more than 20% from where it ended last year.
We see the same story at Whiting Petroleum. After spending $554 million in capex last year due to a small spending boost as oil prices increased, the company anticipates investing at nearly double that rate this year after setting a $1.1 billion capex budget. That capital will, likewise, result in a steady increase in Whiting's output, which should hit 140,000 BOE/d by year-end, up 23% from the start of the year.
Devon Energy's budget has also come roaring back in 2017, with the driller planning to spend $2 billion to $2.3 billion. That's enough money to double the company's rig count by the end of the year, which should boost its oil output 13% to 17% versus last year.
Image source: Getty Images.
Barely blinked
Even drillers that didn't cut back as dramatically last year are planning big spending boosts in 2017. For example, Permian Basin driller Diamondback Energy (FANG 0.76%) only trimmed its budget from $400 million in 2015 to an initial range of $280 million to $350 million last year. However, after completing a monster acquisition, Diamondback Energy is significantly ramping up spending in 2017, with plans to spend between $800 million to $1 billion this year. That's enough capital to boost Diamondback Energy's production by a stunning 65% over last year's average when taking into account the acquired production.
Fellow Permian-focused driller Concho Resources (CXO +0.00%) also didn't cut spending that dramatically last year, with its budget falling from $1.8 billion in 2015 to $1.3 billion last year. However, that was still enough money to boost Concho's output by 5% thanks to its low-cost Permian position, acquisitions, and productivity gains. For 2017, the company initially set $1.5 billion as its midpoint spending level. However, it recently boosted that midpoint up to $1.8 billion, which is enough capital to increase Concho's production by 20% to 24% above last year's level.
Investor takeaway
Shale drilling is expected to stage a dramatic comeback this year, with the hardest-hit producers projecting some of the most remarkable spending increases. Meanwhile, even those producers that barely blinked during the downturn are hitting the accelerator this year. This renewed bullishness in the industry is a welcome sign after two brutal years. It does raise the question, though, of whether drillers are ramping back up too fast, which might cause supplies to grow too quickly and lead to another nosedive in oil prices.
