Capex Hits Five-Year High Despite Significant Cuts To Cash Flow
North America’s oil and gas capital expenditure is at a five-year high despite significant cuts to operating cash flow caused by lower per-bbl prices.
Evaluate Energy has created a study group of 87 U.S. and Canadian domestic-focused companies to examine quarterly changes in cash usage, a key barometer of how oil and gas companies feel about the present market and their confidence in the future.
Around $25 billion in capex was deployed in Q1 by these domestic producers excluding all M&A activity — the highest level of spending per quarter since 2018, and the tenth consecutive quarterly increase.
Evaluate Energy’s streamlined cash flow data helps uncover some of the key reasons why.
Free cash flow is still high
Producers have seen operating cash flow decrease significantly in recent months. Q1 2023 saw $42 billion generated by the study group — around $20 billion less than just under a year ago.
Despite this, U.S. and Canadian producers continue to increase exploration and development capital spending.
The fact is Q1 2023 was still a relatively bumper quarter for both operating and free cash flow — the difference between operating cash flow and capital expenditures.
Since the start of 2018:
- Only periods in 2022 saw higher operating cash flow than Q1 2023;
- Free cash flow hovered around $17 billion. Pre-pandemic, no quarter even got close to hitting $10 billion.
Debt is not a factor
Importantly, company debt is largely under control. A deeper dive into the data illustrates this change over time.
For sure, debt was the focus in late 2020 and early 2021. As producers emerged from the pandemic, they tackled immediate debt problems and it’s less of a priority now.
- Debt was intensely tackled at 37 per cent of all cash used in Q3 2021; the only quarter over five years where debt management outranked all other cash usage.
- The percentage of cash for debt dropped sharply to 16 per cent in Q3 2022. It dropped below 10 per cent in Q1 2023, the first time post-COVID.
Plenty of cash for dividends and buybacks too… for now
Q1 2023 saw 35 per cent of all cash used for dividends and buybacks. This is slightly down on the quarterly average since Q3 2022, but way above the five-year average of 22 per cent.
Capex is on the rise while dividends and buybacks absorb a substantial and sustained portion of cash. Evidently, free cash flow is yet to hit levels where promises made over shareholder returns conflict with capital spending plans. There is clearly plenty of cash for both at present.
- Capital Spending