Coordinated capex growth projected for second straight year

In 2018, a 20% increase in North American capex lifted the global average to 9%, signaling the second consecutive year for global growth and the first year of coordinated growth between North America and international activity. Results from our 2019 survey indicate global capex is poised to increase for a third straight year, while coordinated growth expands into a second year. However, growth is moderating in North America and could drag on worldwide growth despite an acceleration internationally. 

The U.S. will continue to pace spending gains in 2019, with an estimated 10% lift to capex. In Canada, our survey points to 5% growth, but flat-to-declining capex is more likely, as operators continue to work through the budgeting season, Table 1. 

International spending is projected to improve 7%, with 2019 marking the second year that all three regions have simultaneous increased spending since 2014. This is a welcomed change for OFS providers with appreciable exposure to international land/offshore. This reawakening outside of NAM is vitally important on broader OFS profitability, Table 2. 

Despite consecutive years of capex improvements, 2019 spending may remain 35% below peak-2014 levels. Increased spending will not adequately safeguard against a looming supply disruption. 

Oil price wildcard. Historically, companies practiced conservatism when setting price expectations. From 2000 through 2014, initial projections for crude underwhelmed the realized price by 20%. But after three years of lower prices, operators have been slow to step up their price assumptions. Having benefited from actual prices that were $5-$15/bbl above their expectations in 2018, companies reestablished the positive price trend and headed into the 2019 budget season with $60/bbl WTI assumptions. However, 70% of operators said they would reduce spending in 2019 at $48–$50/bbl WTI. 

Cash flow and oil price remain the leading determinants of budget decisions in 2019. These two factors have ranked one or two over the past nine years, following an 11-year stretch where natural gas prices dominated. While the shift from a natural gas-driven market to an oil-focused one around 2010 is well-known, the growing importance of capital availability remains a relatively new trend. Capital austerity has grown since the oil price collapsed in late 2014, and has been a top-four budget factor since 2015. 

Service pricing began to rebound in 2017, as providers began reversing concessions ceded during the downturn. While momentum slowed, and in some cases reversed in 2018, pricing has largely begun to rise across all segments and geography. Overall service pricing has improved 45% to 55% for land-based operations from trough levels established during the 2014-2016 downturn, which implies upside remains to return to pre-downturn levels. However, more price increases are required to incite further capacity additions, as returns do not yet justify the investment. The current margins are unsustainable for much of the service industry. Half of the respondents continue to budget for flat service costs in 2019. 

DUC focus. Evercore predicts a shift from factory drilling to completion when budgets reset in 2019. Drilling costs declined in importance as factors driving 2019 budgets, with just 13% of survey respondents citing it as a key determinant for setting their budget, versus 30% in our 2018 survey. This suggests an oncoming shift to a frac factory model of completion. 

Exploration spending. It appears that exploration spending bottomed in 2016, at least in the U.S., and a tepid recovery that began in 2017 could pick up steam in 2019. Almost one-third of respondents are planning to increase their exploration budgets in 2019, the highest level in our survey since 2015, while 50% plan to keep exploration budgets flat and 20% plan to decrease. This marks a third straight year that more E&Ps plan to increase their exploration spending than decrease. 

Offshore upturn. Despite the recent pullback in oil prices, the offshore rig market remains encouraging with demand still healthy at $60/bbl (Brent). An M&A consolidation is coinciding with dayrates that have already moved substantially higher for harsh environment floaters and high-spec jackups. Evercore predicts the high-spec drillship segment is next, as the industry continues to proactively manage supply. In addition to retiring 18 floaters and 36 jackups year-to-date, the industry continues to defer acceptance of more newbuilds than it accepts. 

REGIONAL BREAKDOWN 

North America. In the second half of 2018, completion activity slowed in North America, as operators experienced budget exhaustion and higher service costs caused budgets to be expended early in the year. Concerns around takeaway constraints in the Permian and widening differentials across several basins also combined to drive slower completion activity. An additional headwind came from falling commodity prices heading into budgeting season. While spending was expected to decelerate following a robust 47% growth in 2017, 2018 overall still saw spending increase 20% vs. 14% growth anticipated in our mid-year survey, this despite a slowdown in activity starting in the middle of the third quarter. Our 2019 survey suggests capex growth remains robust at 10%, but given the pullback in oil prices, it appears more likely that the industry will muddle through the first half before a rebound starts to occur in second-half 2019. 

U.S. onshore. While the U.S. rig count continued to push higher in the fourth quarter, it was masking how cycles have become increasingly shorter. Historically, a 3–4-year growth cycle was followed by a few quarters of slowdown. Now, the cycle is 3–4 quarters of growth before a slowdown occurs. These shorter cycles are forcing the industry to build new, sustainable business models.  

Canada. Evercore expects production and completion service companies operating in Canada to experience several bad quarters, with activity levels declining for unfavorable weather and still-wide crude price differentials. Moving Canadian oil by rail is expected to rise from current estimates of 270,000 bpd to 450,000 bpd by third-quarter 2019. The Canadian Association of Oilwell Drilling Contractors forecasts a 10% decline in the rig count during 2019, with pricing differentials and pipeline delays curtailing capex. In early December, Canadian Natural Resources announced a 2019 capex plan that is $1 billion below its normalized range, because of uncertainty in the Canadian crude markets.  

Middle East. Evercore’s mid-year 2018 survey foresaw an 8% increase in spending in the Middle East that remains, and our initial 2019 survey suggests spending growth could double in the coming year. Several ambitious NOC plans are buoyed via multi-year, transformational efforts carried out by their countries. Despite setbacks to Iran, the regional outlook is solid, with an expected supply growth of over 2.5 MMbpd by 2025, led by Iraq and the UAE. Underpinning our view is the broad effort to expand natural gas production, with Saudi Arabia and Kuwait transitioning their production base to become more gas-centric. Entrenched OFS players are at an advantage.  

Russia/FSU. Capex in Russia and the FSU pulled back unexpectedly in 2018, falling 3% vs. the 13% growth forecast in our mid-year. While Gazprom continues to increase capex for progress made on Yamal LNG and other gas-driven projects, Gazprom Neft, Lukoil and Rosneft all posted lower capex. Although production and profit swelled, Gazprom Neft postponed firming development plans for its giant Neptune discovery and may need to bring on partners to develop its estimated 5.6 Bbbl of reserves. 

The Kazakhstan government and Eni-led stakeholders recently resolved long-standing disputes over profit sharing at the Karachaganak gas and condensate field, which should improve business relations in the region. Malaysia’s Reach Energy had success in the first of six exploration wells targeting oil at the Emir Oil concession block, and Lukoil and KazMunaiGaz recently agreed to invest almost $300 million to develop the Zhenis block in Kazakhstan’s Caspian Sea waters. Chevron is investing $4.3 billion in the Future Growth Project at Tengiz field. 

Latin America. Finally putting a stop to three consecutive years of declining capex, 2018 was a much-needed bounce off the bottom, with capex growing 19%. However, Evercore expects spending to decline slightly in 2019, making it the only region to see a pullback in year-over-year plans. Capex remains well below 2013–2015 levels, as key countries experience geopolitical instability from recent elections and accelerating inflation. It will be challenging for Latin America to return to sustainable capex growth without more stability around key oil producing countries like Mexico, Brazil and Venezuela. 

Europe. At mid-year, we predicted European investments would increase 7% for 2018, up from 5% growth in 2017. However, a pickup in spending resulted in a 9% increase, led by Aker BP, Equinor and OMV. European capex is now 14% off the 2016 trough but still 30% from the 2014 peak. While the operators that drove 2018 capex higher plan to keep spending relatively flat in 2019, upside could come from private firms and independents. The creation of larger independents could be a net positive event. European spending should increase for a third straight year in 2019, but by a modest 1%. 

Asia/Australia. Current estimates for 2018 are for spending to slip a modest 1% among Asian and Australian producers, a sharp pull-back from the 14% growth anticipated in our mid-year 2018 survey. Almost all operators spent less than expected, with the largest regional players  all retracing. Despite the sharp increase in commodity prices experienced throughout much of the year, operators apparently cut their 2018 capex, due to macro uncertainties stemming from the trade war. We forecast capex to increase 16% in 2019. 

Africa. Our 2019 survey suggests capex increased 23% for a select group of African companies in 2018, building on revised 4% growth in 2017. Africa has been one of the most challenged regions, with recovery delayed by territorial disputes, political reform and security risks. However, the outlook is beginning to improve.