Investors, in turn, are rewarding the discipline—most of the 20 top-returning firms in the S&P 500 year to date are oil companies, including Occidental, Coterra Energy, Valero, Marathon Oil, APA, Halliburton, Devon Energy, Hess Corporation, Marathon Petroleum, ExxonMobil, ConocoPhillips, Chevron, Schlumberger, EOG Resources, and Pioneer Natural Resources.
As a result of the highest oil prices since 2014 and capex discipline, the shale patch is on track for massive free cash flows of a combined $172 billion in 2022 alone, per Deloitte estimates cited by Bloomberg. By 2020, the shale industry had booked $300 billion in net negative cash flow in the 15 years since the first shale boom, Deloitte estimated back then.
Unlike in the previous upcycles, U.S. producers are now directing a large part of the record cash flows to boost shareholder returns with higher dividends, special dividends, and share buybacks.
U.S. producers do not plan to abandon the newly-found capital discipline and will grow production only modestly, the top executives at most public shale producers said during the Q1 earnings calls this week. Many firms acknowledged the supply chain, inflationary, and labor constraints that could result in slower American oil production growth than the increase the EIA and analysts expect. Producers are also wary of the Biden Administration’s calls for only a short-term ramp-up in production amid otherwise negative comments on the oil industry, which undermines the firms’ visibility and willingness to plan higher investments in the medium term.
“To say bluntly, the administration's comments are certainly causing a lot of uncertainty in the market, both in the terms of regulatory taxation, legislation, and negative rhetoric toward our industry. And that creates uncertainty in our owners', our shareholders' minds about what the future of this industry really is,” Diamondback Energy’s CEO Travis Stice said on the earnings call this week.
Diamondback Energy will keep its current oil production levels of 220,000 net barrels of oil per day, Stice said.
“While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels into multiple quarters from now,” he added.
Another producer, Devon Energy generated $1.3 billion of free cash flow for the first quarter, its highest-ever quarterly FCF.
“With this increasing amount of free cash flow, our top priority is to accelerate the return of capital to shareholders,” CFO Jeff Ritenour said.
Continental Resources “delivered a record quarter of adjusted earnings per share and exceptional free cash flow generation,” CFO John Hart said as the shale giant announced a fifth consecutive increase to quarterly dividend.
Chesapeake Energy, which went through a bankruptcy during 2020, reported $532 million in adjusted free cash flow for Q1, its highest quarterly FCF ever, and launched a $1-billion share and warrant repurchase program.
Pioneer Natural Resources, for its part, will be returning 88% of its first-quarter free cash flow of $2.3 billion to shareholders, while keeping disciplined oil growth of up to 5%, CEO Scott Sheffield said.
It was Sheffield who said as early as in February: “Whether it's $150 oil, $200 oil, or $100 oil, we're not going to change our growth plans.”
In Pioneer’s earnings call this week, Sheffield said that U.S. shale would likely grow less than the EIA and other analysts expect, which would put upward pressure on oil prices.
“What’s happening now in regard to labor constraints, frack fleet constraints, inflation constraints - I just think it’s going to be tough to hit some of the numbers. It even makes me even more bullish about some of the oil price numbers that are out there,” Sheffield said, as carried by Reuters.
Sheffield sees U.S. oil production growing by 500,000 bpd-600,000 bpd this year, compared to EIA and other estimates of 800,000 bpd-1 million bpd growth.
Added to operational constraints and capital discipline is the industry’s frustration with the Biden Administration, which producers say has singled out oil firms to blame for the highest gasoline prices in eight years, while calling for a short-term jump in production. Democratic lawmakers even said last week they would propose legislation to allow state and federal agencies to “go after” oil companies. Senate Majority Leader Chuck Schumer compared oil firms to “vultures” booking record profits and using the COVID and Ukraine tragedies for market manipulation.
“Talk about mixed messages. We can’t treat the oil and natural gas industry as a kind of light switch that is turned on or off to suit the political moment,” American Petroleum Institute (API) President and CEO Mike Sommers said this week.
“It can be easy and fashionable to speak as if we hardly even need oil or natural gas anymore. But then disruptions occur, and once again everybody is staring down the truth. Now, suddenly, some policymakers want to flip the switch “on” again, but only for a short time. And as practical realities intrude, mostly what we hear from Washington is blame-shifting and excuses,” Sommers added.
