Despite higher oil prices, early indications from operators suggest that E&P capital expenditures will look similar to 2020. Figure 1 demonstrates the wide array of capex adjustments from 2020, yet collectively flat year over year. With free cash flow the focus of many investors, we may see more commodity price-dependent plans this year as some operators are committing to spend only a certain amount of their cash flow.
As the early-2021 activity increases from late-2020 levels, service costs will likely creep higher. How much higher will be the question, and we can expect analyst questions surrounding the supply and demand of rig and frac crews, and how they will influence 2021 plans.
After the “what” is answered about 2021 budgets, the next question will be “where.” Some operators pivoted in the second half of last year to focus on gassier wells, hoping to take advantage of highly anticipated heating season prices. A warm start to winter punished gas prices, and with WTI now in the low-$50s, investors will want to know where operators are playing their cards.
A wave of M&A activity hit in late 3Q20 and management teams were prodded on whether they would participate in the trend. Deal activity since cooled off in Q4, but the new year and a positive fundamental outlook could reignite the fire.
The downturn in drilling last year disproportionately put completion crews out of work relative to rigs. Therefore, many operators now sit on many months worth of drilled uncompleted wells. This inventory is beginning to dwindle with an increase in frac crews but many uncompleted wells remain, potentially easing 2021 expenditures.
FIGURE 1 | Forecast Spending 2021 Versus 2020