U.S. oil producers reported revenue from natural gas comprised a larger share of total revenue as crude oil prices exceed pre-pandemic levels, according to the U.S. Energy Information Administration (EIA).
Some U.S. oil producers are receiving more natural gas revenue as a result of higher natural gas prices and increased takeaway capacity in the Permian region, especially since late 2020. As a result, the oil companies reported a large increase in operating cash flows in second-quarter financial statements. Prices, revenues and operating cash flows have returned to or surpassed 2019 levels for these companies, while growth in their capital expenditures has been about half of 2019 levels, which could affect future rig counts and production.
The EIA’s most recent Drilling Productivity Report shows the United States had 5,957 drilled but uncompleted wells in July, the lowest for any month since November 2017. The decline in drilled but uncompleted wells reflects more well completions but less new well drilling activity. The completion of more wells is increasing oil production in the Permian region, but the completions are reducing the inventories of drilled but uncompleted wells, which could limit oil production growth in the coming months.
As of Sept. 17, West Texas Intermediate (WTI) crude oil prices were an average of $69.35 per barrel and have surpassed 2019 levels after falling in 2020 at the onset of the COVID-19 pandemic. U.S. crude oil production was an average of 10.6 million barrels per day, or about 2.5 million barrels per day lower than its three-year peak in March 2020. Oil rig counts were an average of 404, or 46% of their three-year peak in November 2018.
Higher oil prices are increasing oil revenue amid lower crude oil production levels, yet crude oil companies have not increased capital expenditures to 2019 levels. This has contributed to higher free cash flow, allowing oil producers to pay for capital expenditures with cash instead of raising debt or issuing equity. As of July, the companies have drilled fewer wells and accessed their inventory of drilled but uncompleted wells to complete new wells at reduced costs.
Recently, natural gas prices have increased, and oil producers are benefiting from the rise. According to the EIA, the U.S. natural gas benchmark Henry Hub spot price has increased to more than $5 per million British thermal units as a result of record heat on the West Coast, production outages on the Gulf Coast because of Hurricane Ida and rising international demand for liquefied natural gas (LNG). For oil producers, shares of natural gas revenue rose and accounted for 14% of total first-quarter revenue, the highest share since at least 2018. The share fell to 10% in the second quarter because oil prices rose and natural gas prices fell. However, the share might rise in the third quarter because of the recent rise in natural gas prices.
The expansion of the natural gas pipeline system in West Texas also has contributed to higher natural gas revenue. Higher natural gas prices at Waha, the natural gas market hub of West Texas, have led to an increase in revenue of natural gas produced in the Permian region, which accounted for 15% of U.S. natural gas production between the fourth quarter of 2020 and July.