Unlike in the previous downturn in 2015-2016, U.S. shale producers are exiting the 2020 oil price and demand collapse with their promises intact to rein in production growth and return more cash to increasingly demanding shareholders.
The first-quarter earnings and conference calls highlighted a previously unheard-of restraint from public shale firms. Listed producers generated record cash flows, but they are not reinvesting most of those back to drilling. Instead, shale operators are now channeling cash flow toward reducing debts and rewarding shareholders.
Despite the first-quarter rally of over 20 percent in oil prices, U.S. shale did not break the promises to keep a lid on production and prioritize returns.
While analysts are not surprised that this time—unlike in any other time in recent history—American producers refrained from raising production, some industry observers question how long this restraint will last. Most analysts believe this would be a theme through at least all of 2021.
Judging from the first-quarter earnings calls, most public U.S. shale firms will be sticking to the new priority of sending cash shareholders’ way, not sinking it in the ground to chase record production, at least for a few quarters until global oil demand and supply-demand fundamentals return to pre-crisis levels.
Record Free Cash Flows
Many U.S. shale producers generated record free cash flows in the first quarter, and the sector as a whole is expected to continue generating more free cash flow than at any given point in the past, according to a Bloomberg Intelligence analysis of 31 independent firms.
EOG Resources, for example, generated a quarterly record $1.1 billion of free cash flow and earned $1.62 per share of adjusted net income, the second-highest quarterly earnings in company history, chairman and CEO Bill Thomas said on the earnings call.
Debt & Dividends Now More Important Than Oil Production
EOG Resources also declared a $1 per share special dividend “to demonstrate our commitment to returning cash to shareholders.”
Combined with a regular dividend, the firm expects to return $1.5 billion to shareholders through dividends in 2021.
“The top priorities for the allocation of that free cash flow remain sustainable dividend growth and debt reduction,” chief financial officer Tim Driggers said.
Continental Resources, for its part, reinstated dividend, accelerated debt reduction, and raised free cash flow guidance for full-2021 to $1.7 billion at $60 WTI and $2.75 per Mcf Henry Hub prices, up by 30 percent from earlier projections.
Continental’s four key pledges to investors are free cash flow commitment, capital discipline, strengthening the balance sheet, and cash returns to investors, said Rory Sabino, Vice President, Investor Relations.
Devon Energy declared a fixed-plus-variable dividend of $0.34 per share based on the company’s first-quarter financial performance. This is a 13-percent increase in payout compared to the dividend for the fourth quarter of 2020.
“The company is committed to its maintenance capital program and has made no modifications to its full-year capital budget or production outlook,” Devon Energy said.
“With fundamentals signaling maturing demand dynamics for our industry, we fully recognize the traditional E&P model of prioritizing only production growth is not the correct strategy going forward,” president and CEO Rick Muncrief said on the earnings call.
“High returns on capital employed, reduced reinvestment rates, and cash flow generation will determine the winners in this cycle, not the historic behavior of delivering outsized production growth,” Muncrief added.
Devon Energy’s top executive summed up what many public independent shale producers have been signaling for months:
“I feel it is important to reiterate that we have no intention of allocating capital to growth projects until demand side fundamentals recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets.”
Even supermajors Exxon and Chevron are not rushing to boost production in the Permian basin in the near term, not until “the world needs the barrels,” as Chevron’s chief financial officer Pierre Breber said on the Q1 earnings call.
Anecdotally, this approach from Exxon and Chevron appears to have drilled up quite a bit of support amongst Oilprice readers...
Ok, we are calling it. The oil industry is officially back!
But which of the majors are you most excited about:$XOM, $CVX, $RDS.A, or $TOT?
— OilPrice.com (@OilandEnergy) May 20, 2021ADVERTISEMENT
Is Discipline The Dawn Of A New Shale Era?
It is clearly evident that shale producers kept their promises in the first quarter this year and prioritized handing out more payouts to shareholders with the record free cash flows, analysts say. Yet, the jury is still out if the industry’s new priorities will be the new long-term strategy, especially when global oil demand returns and OPEC+ unwinds all the production cuts. Related: $70 Oil Could Put The Brakes On China’s Crude Buying Spree
Independent shale producers tracked by energy data provider Enverus raised their cumulative Q1 cash flow tenfold from last year.
The industry has shifted from production growth to cash generation, thanks to capital discipline amid rising commodity prices, Enverus said.
“The question in most investors’ minds is will this be sustained into the future or will the industry shift back to growth and put pressure on commodity pricing with an influx of supply?” analysts note.
“[T]he ultimate trending phrase in E&P operators’ earnings calls was “positive free cash flow,” indicating continued upward trajectory out of the crude abyss,” Justin Ramirez, Senior Financial Analyst at Mercer Capital, wrote in an overview of the Q1 themes.
“[T]he general consensus is that significant production growth is not desirable at this juncture. Steady operations is the name of the game at the moment,” Ramirez added.
By Tsvetana Paraskova for Oilprice.com
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The days of reckless production to achieve Trump’s hollow and grandiose slogans of ‘energy independence’, ‘US energy dominance’ and ‘America, the world’s largest crude oil producer’ were over. They were like castles built on the sand.
While the United States is now self-sufficient in coal and natural gas, it will never become oil independent in the future. US consumption and production figures attest to that.
US production and consumption in 2019 were 12.23 million barrels a day (mbd) and 20.46 mbd respectively according to the 2020 BP Statistical Review of World Energy meaning that US net crude oil imports amounted to 8.23 mbd. US imports will continue to rise in coming years. Therefore, the talk about US oil independence is wishful thinking.
OPEC+ has emerged from the ordeal of the COVID pandemic more powerful and more respected than before the pandemic because of the brilliant way it stabilized the global oil market and prices.
The US shale oil industry has emerged leaner, weaker and far less influential in the global oil market than before with its fate in the hands of OPEC+. If US shale oil drillers ever try again to undermine OPEC+’s policies and measures to support oil prices and stabilize the oil market, OPEC+ will go for a strategy of expanding its market share thus causing prices to fall below the breakeven price of most shale oil producers.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London