Oil producers invest 72% more in capital in 4Q

U.S. oil producers increased capital expenses by 72% or $4.9 billion in the fourth quarter of 2016, compared to the same period in 2015, according to U.S. Energy Information Administration. The information is based on 44 U.S. companies’ quarterly financial reports, and this was the largest increase since the first quarter of 2012 for these companies, which are focused on onshore oil production.

And, based on financial reports, these companies are continuing to invest into capital spending “in exploration and development, supporting continued production growth in the United States,” according to the EIA. Between Dec. 31 and March 31, the number of active oil rigs in the United States increased 26% to 662, from 525.

Higher oil prices have led to increased earnings for U.S. oil producers, and as a result, have increased their budget for capital projects. Over the past two years, lower levels of investments “likely contributed to a reduction in cash from operations for these 44 companies despite an increase in crude oil prices.” These companies saw a $475 million reduction in cash from operations in the fourth quarter of 2016, compared to the same period in 2015. “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.”

The companies’ capital spending was greater than cash from operations “because they invest to develop reserves that will increase oil production and cash flow in the future,” according to the EIA. “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 of how the oil producers are hedging is the number of “short positions, or future sales into these markets.” As of mid-February, the number of short positions rose to 756,000 contracts, “close to the 10-year high of 802,000 contracts.”