After navigating the treacherous waters of the pandemic and the downcycle, upstream operators had their best year in decades in 2022, fortifying balance sheets and delivering cash flow surpluses that were the envy of the equity markets. But moving from zero to hero has furnished operators with a novel set of challenges as they seek to build on their success to show sustainable value. This report highlights our view of what will unfold in the year ahead both inside and outside the sector and will serve as a guide for the research topics we will tackle throughout 2023.

1. Not screwing up the (last?) oil boom.

Cash will rain down again, but the blockbuster pace of capital returns in 2022 will decline as prices moderate and capital efficiencies erode due to continued service sector inflation and fewer DUCs available to liquidate. Importantly, companies will not "take the bait" and reinvest heavily to grow production. Global capex and project final investment decisions (FIDs) will reach pre-pandemic levels but won't adjust upward to account for the price upcycle, the 2020 investment hole, or the downshift in shale reactivity.

2. Right or wrong, it is tough to bet on long-term oil.

The growing uncertainty around the trajectory of long-term oil demand tends toward less greenfield exploration and more exploration of green businesses. As governments and industry both accelerate promises of net zero, the perception of the risks to the future of oil and gas profitability rises.

3. The new pricing rules create a playing field between $70/bbl and $120/bbl WTI. Less energy price panic and more acceptance of "higher for longer."

The global oil market continues its search for a new, reliable price formation mechanism as the 2015-2019 model–in which shale delivers all marginal barrels below $60/bbl–has disappeared. Finding the new mechanism and equilibrium will take time and the road will be bumpy. Yet we believe the market is learning about how supply and demand react at different bands of oil and gas pricing.

4. "I'm not dead yet": Shale refuses to go on the cart and the sweet spot exhaustion story is overdone.

At WTI prices above $85/bbl, US shale outperforms the current (low) growth expectations. Even limited to less than 320 completion crews, the industry can deliver 700,000+ b/d of entry-to-exit growth for the next several years. Furthermore, our analysis suggests that well quality degradation is limited to the Eagle Ford, with other areas unable to improve much but maintaining recent productivity levels.

5. North Americans and NOCs push harder on energy transition investment but stay close to core skillsets.

Meanwhile, the divergence of the aspirations and portfolios of European IOCs continues to grow. All sides of the energy transition debate are interpreting the upheavals of 2022 as validating their view of the need for change. In reality, everyone is in a better spot than a year ago and is moving faster.

6. Buy ‘em back.

With balance sheet repair completed and regular dividends re-established, companies will increasingly favor the flexibility and perceived permanence of share buybacks over special dividends, acquisitions, and increased capex.

7. Looking for a piece of the global LNG bonanza.

The explosion of LNG prices in 2022 and the drive to disconnect Europe from the lifeblood of Russian gas is impacting portfolio decisions across the upstream sector.

8. "We must carbonize before we decarbonize."

Producing countries in the developing world will become more vocal in the debate over the energy trilemma (clean vs. secure vs. affordable) and on their plans to leverage their hydrocarbons for development. Gulf countries/NOCs will position themselves as winners in all three dimensions.

View the full report here