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April 3, 2017

U.S. oil producers increased investment in fourth quarter of 2016

graph of quarterly sources and uses of cash for onshore-focused U.S. oil producers, as explained in the article text
Source: U.S. Energy Information Administration, based on Evaluate Energy

Capital expenditure for 44 U.S. onshore-focused oil production companies increased $4.9 billion (72%) between the fourth quarter of 2016 and the fourth quarter of 2015 based on their public quarterly financial statements. This increase in investment spending was the largest year-over-year increase for any quarter by these 44 companies since at least the first quarter of 2012.

Higher oil prices are contributing to an increase in upstream earnings for U.S. producers, prompting some companies to increase their investment budgets. Company announcements and increases in the number of active oil rigs suggest U.S. oil production companies are continuing investment growth in the first quarter of 2017. The U.S. active oil-directed rig count reached 662 on March 31, 2017, up from 525 at the end of 2016.

Lower investment levels over the previous two years likely contributed to a reduction in cash from operations for these 44 companies despite an increase in crude oil prices. The reduction in cash from operations for these 44 companies totaled $475 million year-over-year in the fourth quarter of 2016. Significant reductions in exploration and development spending in 2015–16 led to less drilling, which reduced oil production in the fourth quarter of 2016, offsetting increased revenue that came from higher prices. Cash from operations lags capital expenditure for these companies because they invest to develop reserves that will increase oil production and cash flow in the future.

Many of these companies use oil futures and options to hedge their investment in production into the future. Financial hedging for producers reduces the effect of a fall in revenue if prices were to decline. A measure for the amount of future production oil companies have hedged is the number of short positions, or future sales into these markets. These short positions consist of futures and option contracts held by producers and merchants. Producers have begun using them more since crude oil prices rose above $50 per barrel in the fourth quarter of 2016. In mid-February 2017, the number of short positions in U.S.-based futures and options reached 756,000 contracts, close to the 10-year high of 802,000 contracts.

Financial indicators from these 44 U.S. onshore-focused oil production companies with quarterly financial reports suggest that they are continuing to increase capital expenditures in exploration and development, supporting continued production growth in the United States. Financial results for the first quarter of 2017 will be released in May.

graph of U.S. oil-directed rig count and producers short positions, as explained in the article text
Source: U.S. Energy Information Administration, based on Baker Hughes, U.S. Commodity Futures Trading Commission, Bloomberg L.P.

More information about U.S. oil companies’ financial statements and indicators for oil production is available in EIA’s This Week in Petroleum.

Principal contributor: Jeff Barron