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US Oil & Gas

The Energy Select Sector SPDR Fund (XLE) has underperformed the S&P500 and Russell 2000 indices during 2024 (Fig 1). The S&P 500 has gained ~18%, outpacing the ~8% rise in the XLE and the ~6% rise in the Russell 2000. The XLE’s 1H24 performance likely reflects oil prices trading in the $75 - $80/bbl band for much of the first six months of 2024 and natural gas prices which were negatively impacted by mild winter weather. The latest EIA Short Term Energy Outlook (July 2024) estimated that WTI spot crude oil would remain in the $80 – 85/bbl range through the end of 2025 and natural gas would remain in the $3.00 - $3.50/MMBtu band for much of 2025 (Fig. 2 and 3). The EIA’s commodity price outlook supports the industry’s ambition to return cash to shareholders through dividends and/or share repurchases. The average dividend yield among the Majors and Large Cap E&P companies is ~2.72%, besting the 1.23% yield on the S&P 500. We count 23 Mid- and Small Cap producers that currently pay common stock dividends with an average of 4.78% and a median of 3.65%. Since early 2023, we count more than $240 billion of announced M&A transactions among US oil and gas producers, including more than $70 billion in 2024. A drive to add scale, wring out costs, and increase companies’ capacity to generate free cash flow appears to be one of the primary drivers behind many of the transactions. Greater free cash flow capacity is expected to support many companies’ goals of returning cash to shareholders. Over time, we expect portfolio rationalization in the newly combined assets bases could create further asset acquisition opportunities. We expect 2H24 themes will continue to emphasize balancing growth with capital returns and maximizing cost efficiencies. Acquirors are continuing to work toward realizing the operational and cost synergies in their transactions. We expect companies will maintain development plans for the balance of 2024. The planning cycle for 2025 generally gains momentum in 4Q24 with budget announcements in 1Q25. The US rig count was 584 on July 5, 2024, 38 rigs lower than the end of 2023 and 92 rigs lower than one year ago (Fig. 4). US operators in unconventional resource plays continue pushing longer horizontal laterals to expose more reservoir rock in a single wellbore with the goal of increasing efficiency in their development programs. For service providers, longer wellbores increase the drilling and completion intensity creating revenue opportunities. As a result, we believe the correlation between working rigs and service intensity is decoupling for some providers. According to EIA’s latest forecasts, US oil and natural gas production are expected to continue growing through 2025 (Fig. 5 and 6). Lower-48 (L48) oil production is forecast to reach 11.7 MMb/d in December 2025 and L48 natural gas production is forecast to reach 114.4 Bcf/d in December 2025. The upcoming US election could have an impact on regulations and policies that impact the industry’s capital allocation decisions in 2025 and beyond.