DALLAS—During the shale revolution, analysts and investors used to reward E&Ps for growing production at all costs. Experts say those days are over, probably forever.
Today, the investment community is much more keen on E&Ps shoring up their balance sheets, paying off debt and returning as much cash to shareholders as possible, White & Case Partner A.J. Ericksen said at Hart Energy’s Energy Capital Conference 2023 in Dallas.
Compared to the early days of the fracking boom, E&Ps aren’t in a huge rush to pump money into their undeveloped shale inventory. Most producers are operating in maintenance mode, where they’re maintaining—or slightly boosting—oil and gas output, and generating piles of free cash flow in the process.
But even just maintaining current production levels, not massively growing output, requires a significant amount of capital investment by shale E&Ps.
“If you’re a pure shale company, and you have a baseline decline approaching, in some cases at least 40%—just to stay stable is more challenging than sort of meets the eye,” said Neal Dingmann, managing director of energy research at Truist Securities.
E&Ps are deploying cash to keep production relatively flat, but they’re also pumping huge amounts of cash into buying back shares, paying out dividends—and reducing debt. “The average leverage for my companies is the best it’s been, certainly in over a decade,” Dingmann said.
Some investors question how long the gravy train can last. In many cases, oil and gas companies are raking in more free cash flow than ever, but they’re drilling through their top-quality acreage as costs to drill new wells rise.
“For shale, the biggest issue today is depth of inventory and quality of inventory,” said James Wicklund, managing director of client relations and business development for PPHB. “And if you’ve got a lot of depth and great quality, then maintaining that production is one hell of a lot easier.”
RELATED
Middle Innings: Shale E&Ps’ Slow Struggle to Woo Back Investors
M&A inventory scramble
Big E&Ps, such as supermajors Exxon Mobil and Chevron and the Permian Basin’s giant independent Pioneer Natural Resources, have long runways of undeveloped drilling inventory.
When they’re not deploying cash toward shareholder returns, small- and mid-sized E&Ps with shorter runways are making big acquisitions to shore up more undeveloped inventory—especially in the Permian, America’s top-producing oil basin.
Permian Resources, Vital Energy, Ovintiv Inc. and other E&Ps have pumped billions of dollars into Permian M&A in recent months.
“A lot of the M&A you’re seeing is actually to lengthen or strengthen depth of inventory,” Wicklund said.
Dingmann said that some of the operators he covers have had to pivot out of their best inventory to start drilling into less economic areas.
“Organic activity is going to be very difficult because you have a huge baseline decline, you have limited inventory,” Dingmann said. “You just have a lot of these things that are stacking up against these companies.”
RELATED
‘Free Cash Flow Utopias’ Offset E&Ps Hurdles to Accessing Capital
Recommended Reading
Markman: Is MethaneSAT Watching You? Yes.
2024-04-05 - EDF’s MethaneSAT is the first satellite devoted exclusively to methane and it is targeting the oil and gas space.
From Satellites to Regulators, Everyone is Snooping on Oil, Gas
2024-04-10 - From methane taxes to an environmental group’s satellite trained on oil and gas emissions, producers face intense scrutiny, even if the watchers aren’t necessarily interested in solving the problem.
Hirs: SEC’s Enhanced Climate-related Disclosures Are Unnecessary—Even According to SEC
2024-03-15 - The SEC’s rationale for enhanced climate-disclosure rules is weak and contradictory, says Ed Hirs.
National Petroleum Council: A Realistic Path to Scaling US Hydrogen
2024-05-15 - A report by the National Petroleum Council, the culmination of about 18 months of work, offered 23 recommendations to help the hydrogen industry grow through 2050.
US EPA Expected to Drop Hydrogen from Power Plant Rule, Sources Say
2024-04-22 - The move reflects skepticism within the U.S. government that the technology will develop quickly enough to become a significant tool to decarbonize the electricity industry.