Expectations Were WHAT Going Into 2023?
Whenever an analyst or market expert publishes a new forecast or model for any commodity price, always be skeptical... always.
One of the more interesting publications that is produced each quarter comes out of the Dallas Fed... specifically the "Energy Survey" report. In the Q4 survey, many questions were focused on asking small (<10k barrels per day) & large (>10k barrels per day) exploration & production companies where they see different commodity factors heading for the following year... I would like to highlight a few of these results that were posted in late December 2022 (only a few months ago), as we are nearing the release of the Q1 2023 results:
Where do you expect Henry Hub natural gas and WTI crude prices to be at the end of 2023?
A lot to digest here and again this type of survey showcases the true complexity and volatility in the commodity markets!
First, if I am an operator planning on drilling & completing new wells in a basin that produces a balanced mix of commodities (60% liquid | 40% gas & NGLs), CAPEX spend & modeling wellhead internal rate of returns (IRRs) both are heavily dependent on what I can sell my associated gas for on a pipeline, and many companies focused on these type of heavy gas regions were were expecting $5-$6/MMBtu gas for the duration of 2023. Obviously since Q4 2022, we have seen gas prices fall from $7/MMBtu to below $3/MMBtu, a pullback of around 60%, mostly due to the following (as bears have finally come out of hibernation):
A warmer than expected winter really pushed demand lower than analyst expectations
Unexpected LNG facility shutdowns (Freeport), which kept more domestic gas in the US and artificially increased the available supply
Continued rise in domestic dry gas production coming out of the Permian & Haynesville
What does this mean for producers who decided to leave their hedge books wide open for 2023 (hoping to ride another year of the geopolitical uncertainty in European gas & LNG markets)? Instead of being able to sell their gas for $4-$5/MMBtu (as these are common ranges that hedged operators locked in at during 2022), operators are now more exposed to less than desirable gas production revenue moving into a new bear market.
Another few survey questions I found interesting were:
Which of the following is the biggest drag on crude oil and natural gas production growth for your firm?
Cost inflation and/or supply-chain bottlenecks: 32%
Maturing asset base: 27%
Availability of capital: 16%
Other: 9%
Uncertainty about government regulation: 9%
Availability and/or quality of labor: 8%
This question & response can be broken down in a few different ways... While the media & public narrative seems to be the "US government is anti oil & gas", the majority of producers don't see this as the most critical constraint holding them back from growing their production targets! It looks like the three main issues on producers mind are increased costs (likely on both the CAPEX and OPEX side), aging oil & gas assets that aren't as profitable to keep online, and the recent heightened borrowing cost that all businesses are facing, as interest rates and the cost to finance wells has a direct impact on the asset's overall IRR.
Finally, I always find the "special" questions rather stimulating...
Which of the following plans does your firm have? (Check all that apply.)
I will save the majority of my thoughts on this chart for my next blog post, however I find the main takeaway from this chart fascinating... Larger oil & gas companies are focused on reducing emissions, cutting methane, limiting flaring, and finding smarter ways to handle produced wastewater. Smaller oil & gas companies appear to be leaning more toward the "none of the above" response... Perhaps the larger companies (coming off a record year in terms of operational profits) are more willing to invest in some of these environmental improvements, while smaller companies are more focused on the bottom line (managing oil & gas wells).
Everyone should visit the Dallas Fed near the end of March, as the Q1 2023 report should be published and I'm sure some of these results and expectations are likely quite different....
SOURCE: Federal Reserve Bank of Dallas
