Energy companies are about ready to loosen the purse strings
The lean years are unlikely to be over for energy companies amid rising crude-oil inventories and global uncertainty, but the industry is expected to start spending again after years of belt-cinching.
OPEC and other major players have agreed to cut production starting this month, but the market continues to be plagued by concerns that some oil-producing countries will not comply with the terms.
Crude futures are off about 2% so far this year but gained 45% in 2016 after two years of double-digit losses that peaked with a 46% slide for 2014.
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To face the precipitous price declines, companies have cut their expenses, laid off employees, and sold so-called “non-core” assets. Spending ticked higher by the end of last year, and Wall Street expects that trend to continue.
With OPEC putting a floor on prices, exploration and production companies “have greater confidence to drill and complete, although the early stages of the recovery will be uneven,” analysts at Barclays said in a recent note.
North American E&P companies are seen as the biggest spenders this year, with Barclays projecting a spending increase of 27% for the year. Overall, spending is seen up 7% globally, Barclays said, citing the results of a yearly survey it conducted with more than 200 companies worldwide. Spending dropped 26% in 2015 and 23% last year.
Despite relatively stable oil prices around $50 a barrel, one concern is higher inventories and little expectations of big draws, said Stewart Glickman, an analyst with CFRA Research.
With high inventories and stagnant prices, “not every play out there is going to make sense, but we are starting to see some optimism,” Glickman said. He expects the uptick in capital spending to be in the high single digits.
Earnings are likely to come in a little higher this year, but no “dramatic changes,” he said.
The Energy Information Administration has forecast Brent crude futures to average $53 a barrel in 2017 and West Texas Intermediate to average $52, close to their levels in the last three weeks of 2016. Prices next year are likely to ride to $56 a barrel and $55 a barrel, the EIA said.
The biggest hurdle, however, are rising inventories, Despite the recent OPEC agreement, EIA expects global petroleum and other liquid inventory builds to continue, but at a slowing rate, in 2017 and 2018.
According to FactSet, analysts expect the 36 energy companies that make up the S&P 500 ‘s energy subindex to end 2017 with earnings of $17.18 a share, compared with earnings of $3.86 a share at the end of 2016. Roughly two thirds of the companies are expected to report rising earnings and sales estimates.
Analysts at Raymond James said the outlook for the sector is “meaningfully better than this time last year,” not only in terms of companies’ financial health but also in terms of drilling efficiency and productivity gains.