CapEx Cuts Continue In The Energy Sector by Andrew Birstingl, FactSet
In the past year, the S&P 500 Energy sector declined in value by 28.5%. No other GICS sector in the S&P 500 has performed worse over that time period. A major cause of this selloff can be attributed to a growing global oil supply and the subsequent fall in oil prices. As a result of this phenomenon, energy producers have been slashing capital expenditures (“CapEx”) relating to oil production in order to preserve cash flow.
Here, we answer:
- How do aggregate capital expenditures in the Energy sector for 2015 compare to a year ago?
- What are analysts forecasting for capital expenditures in the Energy sector for 2016 and 2017, and how does this compare to CapEx estimates from the end of 2015?
- Which energy companies are projected to see the largest CapEx cuts in 2016?
2015 CapEx in Energy Sector Expected to Fall 23.3% YoY
As of February 8, 2016, approximately 50% of energy companies in the S&P 500 had reported earnings for Q4. The blended year-over-year CapEx growth rate for the S&P 500 Energy sector in 2015 was -23.3%, which marked an improvement from the -24.5% rate predicted at the end of 2015. The blended growth rate is computed using an aggregate of the CapEx actuals and CapEx estimates of companies in the Energy sector. The chart below highlights the 2015 bottom-up CapEx for the sector, which amounted to $160.9 billion as of February 8. This represented a 1.7% increase from the bottom-up CapEx as of the end of 2015. One of the contributors to the increase was Exxon Mobil, who reported annual CapEx of $31.1 billion on February 2. This beat analysts’ expectations by over $2 billion.
Analysts Predicting 27.7% Decline in Energy CapEx for 2016; 0.8% Growth Projected for 2017
On December 31, 2015, the bottom up CapEx estimate for 2016 in the S&P 500 Energy sector was $133.5 billion. Since then, analysts have steeply cut their projections. As of February 8, 2016, the bottom up CapEx forecast for 2016 was $116.3 billion, which represented a 12.8% reduction in estimated capital spending for the Energy sector. In terms of growth rates, the CapEx estimate as of February 8 imputed a 27.7% year-over-year decline in capital spending for the sector. This was a much bleaker outlook than the end of 2015, when analysts were only predicting a 15.7% drop in capital expenditures by energy companies. Over this time period (December 31,2015-February 8, 2016), oil prices fell by 19.8% and the S&P 500 Energy sector decreased in value by 6.3%. According to FactSet Commodity Estimates, the mean target price for crude oil in 2016 is $43.80.
Energy CapEx is expected to return to growth in 2017. Analysts are projecting a 0.8% year-over-year increase in capital expenditures in 2017. With that said, analysts called for a 2.6% jump in 2017 CapEx at the end of 2015, but have since cut their estimates due to the continued volatility in oil prices to start the year. According to FactSet Commodity Estimates, the mean target price for crude oil in 2017 is $53.41.
Helmerich & Payne and Ensco Lead Forecasted CapEx Cuts for 2016
Of the 40 companies in the S&P 500 Energy sector, 32 companies are projected to post year-over-year reductions in capital expenditures for 2016. The chart below shows the 10 energy companies expected to see the largest cuts. Helmerich & Payne and Ensco top the list with expected year-over-year reductions in CapEx of 63.1% and 62%, respectively.