Special Focus: 2021 Forecast & Review – E&P Spending

Worldwide E&P expenditures should increase 6.8% in 2021, recovering partially from a 25.3% collapse in 2020. The first coordinated global upturn since 2018 will be led by a stronger rebound in select International regions.

The third worst downturn in 35 years is giving way to the start of a new recovery, one we believe is predicated on massive global stimulus and vaccines to be powerful engines for global economic growth and oil demand in 2021. We forecast global E&P capex to increase 6.8% in 2021, in the first coordinated upturn since 2018, with international accounting for 81% of global spending and a 7.2% gain, outpacing projected North America (NAM) growth of 5.1%, Table 1. Spending in the U.S. will lead Canada, while the international recovery will be led by select Latin American companies and NAM-based independents for key offshore developments, such as Petrobras pre-salt and Guyana/Suriname.

Table 1. North American upstream spending. Source: Evercore ISI Research, company data.

Investments go international. International spending accounts for a near-record 81% of global capex and is projected to increase 7.2% in 2021. Having lagged the NAM recovery, international capex established new lows in 2020, about 8% below the 2017 trough. An anticipated 7.2% year-over-year increase would increase 2021 capex to within 150 bps of the 2017 trough and less than 12% below the 2019 peak, versus U.S. capex that is 45% from its 2018 peak. Capex for select Middle Eastern, Indian, Asian and Australian companies held up the best in 2020 and is projected to recover within 33% of historical peaks, while Latin America and Africa faired the worse at 66% and 56% lower, Table 2.

Table 2. Global upstream spending, excluding North America. Evercore ISI Research, company data.

Digital transformation accelerating. The oil and gas sector is at a crossroads, and digital technology adoption is the solution. However, advanced data analytics, AI/machine learning and remote operations continue to trail shale-driven fracturing/stimulation and horizontal drilling technologies in impacting 2021 spending plans. However, digital technologies are forecast to increase in importance over the coming years. The large-cap OFS companies experienced an increase in their remote drilling operations in March, which reduced operational headcount by 25% to 50% on the rig side. Service companies are expanding remote operations beyond drilling into completions and production monitoring. Estimates suggest that digital technologies could drive $90 billion from annual upstream capex budgets over the next two to three years and be worth a potential $50-billion addressable market for service companies

Cash flow and oil price reign supreme. Cash flow and oil price tie for the leading role in setting 2021 E&P budgets, marking the first time that there has been a tie in our survey history. However, cash flow has ranked 1 or 2 as the leading determinant of E&P spending in all but four of the past 22 years, and has ranked 1 or 2 with oil price since 2011. With the double black swan of Covid-19 and the OPEC+ market share war, cash flow is taking on an even greater emphasis for 2021 spending plans. A near- record 75% of our survey recipients cited cash flow, and a record 75% cited the oil price as the key determinants of their 2021 budget.

Oilfield service pricing. The majority (76%) of all survey respondents expect oilfield service pricing to remain stable in 2021, which is up from 58% heading into 2020. Having given up the most pricing concession in 2020, completion equipment pricing is expected to be the most resilient in 2021 with 88% expecting pricing to remain stable, followed by transportation at second place with 82% and labor at third place. Drilling and fracturing/stimulation services tied for 4th place with 71% anticipating stable pricing in 2021, followed by tubulars. For the second straight year, more of our survey respondents anticipate further pricing concessions than an increase in pricing by a ratio of two-to-one.

Halt in exploration is good for production-oriented OFS. A three-year positive streak in exploration came to an end in 2020, as more E&Ps decreased their exploration spending than increased by a wide 3,500-bps margin. More than one-third of our survey respondents trimmed their exploration capex, while none increased, as operators swiftly froze all discretionary spending early in the year, due to Covid-19 and the OPEC+ market share war. We expect exploration spending to continue trending lower in 2021, as 33% of our survey respondents plan further cuts to exploration budgets as a percentage of total E&P spending.

REGIONAL BREAKDOWN

North America. U.S.-based E&Ps have shifted focus largely from production growth. The industry is, instead, focused on maintaining production without increasing capex, which could be challenging, given shale’s unforgiving decline rates. Despite a rebound in oilfield activity off the summer troughs, the U.S. rig count and frac activity continue to operate at levels well below those required to stave off broad production declines. Capital availability and cost of capital that once supported growth are now impediments, as most operators are forced to keep costs low and generate free cash flow at a $40/bbl price level. Companies are likely to prioritize excess, free cash flow for paying down debt, as a significant wall of maturities comes due over the next five years. The U.S. Bureau of Ocean Energy Management recently hosted Gulf of Mexico Lease Sale 256, which garnered $120 million in high bids for 93 tracts covering 79 million acres. Overall, 23 companies submitted 105 bids, as Lease Sale 256 exceeded expectations.

Canada. Spending plans contracted quickly in Canada, following the collapse of commodity prices in March, as operators prioritized preserving liquidity, given the uncertain impact of the global pandemic on oil demand. However, Canada’s 2020 capex contracted further than expected and continued to drive the country’s underperformance. At less than half its 2018 peak and more than 85% below the historical 2014 peak, Canada accounts for a modest 3% of global E&P spending. Canada has a net-zero emissions target by 2050, causing service companies to get involved in emissions-reduction projects and technologies.

Middle East. We expect spending by select Middle Eastern companies will fall 16% in 2020, slightly below the 13% decline projected in our mid-year survey, and in sharp contrast to the 8% anticipated growth in our initial survey. Capex growth moderated in 2019 for OPEC+ production cuts stemming from December 2018, with the Covid-19 pandemic and ensuing market share war commanding an immediate response in 2020. While headlines called for significant 40%-type cuts, reduction in upstream spending was closer to the 10%-to-20% range, with more drastic cuts made downstream. With OPEC+ production cuts extended to April, spending is likely to remain muted in the near term and compare unfavorably on a year-over-year basis to near-record first-quarter 2020 levels. Spending should begin to improve by the middle of the year and exit higher.

Russia/FSU. Spending by select Russian and FSU companies fell for a third straight year in 2020, but the 19% decline is better than the 31% collapse we had anticipated from our mid-year survey. Russia, along with the KSA, Kuwait and UAE agreed to a record 9.7-MMbopd production cut for May and June, and will delay its production growth plans until second-quarter 2021. We had initially projected spending to grow 6% in 2020. For 2021, we forecast spending to increase 5% and anticipate spending recovers to within 6% of the 2015 trough. Lukoil put $1.5 billion of upstream projects on hold, due to Covid-19 and the OPEC+ alliance, but Rosneft moved forward with full-scale development of the Erginsky license in West Siberia. Multi-stage horizontal techniques are increasing in Russia and account for 43% of Rosneft’s 2020 activity, up 34% in 2019.

Latin America. We expect spending by select Latin America companies to decrease 26% in 2020, in line with our Mid-Year 2020 estimate, and rebound 27% in 2021, to within 5.6% of the 2019 spending level. We had initially expected capex to decline by a modest 3% in 2020, due primarily to cuts from Pemex offsetting gains elsewhere, but Covid-19 and the collapse in oil prices resulted in a 26% decline for the region that established new lows, 9% below the 2017 trough and 66% below the 2014 peak. A 27% rebound in 2021 would lead the international recovery and be driven largely by an increase in offshore spending for Brazil’s pre-salt. Overall, offshore spending in the region should be even higher, with the majors and NAM independents also stepping up development offshore Guyana/Suriname.

Europe. We expect spending by select European companies to increase 13% in 2021 to partly recover the 30% decline experienced in 2020. Capex is likely to finish in line with revised estimates from our mid-year survey, which is a far cry from a flat outlook in our initial 2020 survey. Spending by European operators increased for four straight years from the 2016 bottom, rising within 22% of the 2014 peak. Our 2021 estimate assumes spending recovers to within 21% of the 2019 peak, to a level that is on par with the 2016 bottom and those last experienced around 2007.

India/Asia/Australia. We expect spending by select Indian, Asian and Australian companies to increase 9% in 2021, which more than offset an 8% decline in 2020. Spending held up remarkably well this year, when compared to the 17% contraction projected in our mid-year survey, likely due to the extended downturn experienced from 2016 through 2018. The region had begun to stage an E&P capex recovery in 2019, but the 2020 contraction brought spending back to recent troughs or about 33% from the 2013 peak. We had initially projected modest gains of 1% for 2020. On an absolute basis, Asia represents 30% of total international E&P spending and remains the primary engine for international capex. We forecast the region to account for 43% of 2021 international capex growth, which could be light, with China also leading the global Covid-19 economic recovery.

Africa. Spending by a select group of African companies fell more sharply in 2020 than we had anticipated in our mid-year survey, with capex falling 47% vs. our prior 43% estimate. The revised 2020 capex of almost $7 billion is 56% below the 2012 peak, with the 10% growth we are anticipating in 2021 only modestly narrowing the gap to 53%.