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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Industry's Severe Austerity Pushes Global Capex Down 20-25% to Lowest Level Since 2010
March 23, 2015

For years, Saudi Arabia acted like it wanted an oil boom - and it got a boom. Since last fall, by blocking an OPEC production cut and focusing solely on preserving market share, Saudi has been telegraphing that it wants a bust - so there is a bust of epic proportions. Even though global upstream spending started to peak even before last year's oil price meltdown, the steepness of the 2015 capital spending curtailments is in a league of its own. Based on our survey of 34 top-tier operators from around the world - not a single one of which is increasing spending this year - we project an average spending cut of 20-25%, wiping out all the past increases since 2010. While the survey indicates that onshore U.S. is experiencing particularly severe spending cuts of approximately double the global average - reflecting the short-cycle nature of the drilling activity - virtually all non-OPEC geographies are seeing curtailments of varying degrees. Ultimately, this "austerity on steroids" scenario will result in a supply-led rebalancing of the global oil market - but there is more pain to come before the next upcycle can sustainably emerge. Spending plans for 2015 at this point are still subject to adjustment in many cases, but the really key question is: where will oil prices be at the end of 2015 when the 2016 budgets are going to be decided? Although reductions in cost structures should also play a role, it is safe to say that oil prices will need to be materially higher (versus current levels) by 4Q in order to support a more sustainable level of investment next year.