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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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U.S. Shale Patch Reports Blowout Earnings

  • U.S. shale drillers have posted strong Q3 earnings as a result of rising crude prices
  • Large shale drillers in the U.S. are slow to increase production, and instead focus on shareholder returns
  • 2022 production guidance remains very modest for most large shale drillers
 

Nearly 60% of S&P 500 companies have reported third-quarter 2021 earnings, and the energy sector has again emerged as a standout performer.

According to the latest FactSet data, the Energy sector is reporting the second-largest positive (aggregate) difference between actual earnings and estimated earnings (+15.9%), behind only the Financial sector. 

Within this sector, Phillips 66 (NYSE:PSX) ($3.18 vs. $1.90), Chevron (NYSE:CVX) ($2.96 vs. $2.20), and Valero Energy (NYSE:VLO) ($1.22 vs. $0.92) have reported the largest positive EPS surprises.

However, the U.S. Shale Patch has emerged as the class valedictorian.

After a turbulent period characterized by mounting debts, dwindling cash flows, and awful share performance, the U.S. shale patch has roared back to life with the current earnings season, proving that the worst is finally behind the rearview mirror. Earnings are on tap this week for U.S. independent oil producers, with Continental Resources (NYSE:CLR), Devon Energy (NYSE:DVN), Diamondback Energy (NASDAQ:FANG), EOG Resources (NYSE:EOG), and Occidental Petroleum (NYSE:OXY) all reporting stellar Q3 2021 earnings.

Here's a peek into how shale producers have been faring this earnings season.

#1. Continental Resources

Continental Resources (NYSE:CLR), the shale driller owned by one of the richest and most prominent shale wildcatters, Harold Hamm, has reported strong Q3 numbers that, nevertheless, failed to meet Wall Street's expectations.

Continental Resources has reported Q3 revenue of $1.34B, good for 93.5% Y/Y growth but $70M below the Wall Street consensus. Adjusted net income clocked in at $437.2 MM while GAAP EPS of $1.01 missed by $0.20.

With oil prices consolidating above $80 per barrel, the majority of shale producers are solidly profitable, and many are returning excess cash to shareholders in the form of hiked dividends. Continental Resources has followed suit by hiking its dividend 33% to $0.20, but has also gone off the beaten path–the company is finally taking a stake in North America's biggest oil field.

Continental has announced plans to acquire 92,000 net acres in the Permian Basin from Pioneer Natural Resources Co. for $3.25 billion. The company will pay cash for the assets in the Delaware Basin, a subregion of the massive Permian.

Until now, CLR has focused on the Bakken shale in North Dakota, where it's the largest operator. But with output from other U.S. oil fields flatlining or declining, the Permian's multi-layered tiers of oil-soaked rock offer new avenues for growth. According to Continental, its new Permian assets will pump the equivalent of about 50,000 barrels of oil a day, and generate an extra half-billion dollars in annual free cash flow at current commodity prices.

CEO Bill Berry has revealed that the company has been exploring a potential Permian deal for 20 years, but until now, it "never thought the time was right or the economics were right."

Wall Street is hardly convinced.

CLR shares have tanked nearly 9% after announcing the deal, with Siebert Williams downgrading the shares to Hold from Buy with a $55 price target, cut from $69.  The firm says the deal raises serious questions regarding Continental's M&A strategy, and the lower potential shareholder capital returns over the near future.

Meanwhile, Leo Mariani, an analyst at Keybanc Capital Markets Inc., says the market may not like the idea of CLR getting into a new basin at this point in the commodity price cycle.

Despite the latest selloff, CLR still boasts a 174% gain in the year-to-date.

#2. Devon Energy Devon Energy (NYSE:DVN) has returned its Q3 scorecard that easily beat on both top-and bottom-line expectations. The Oklahoma-based shale producer reported revenue of $3.47B (+224.3% Y/Y), $1.08B higher than the consensus, while net earnings of $838M represented a vast improvement from the $92M loss the company reported for last year's corresponding quarter. Meanwhile, the company reported Q3 GAAP EPS of $1.24 vs.($0.25), beating by $0.31.

Q3 production soared 87% Y/Y to 608K boe/day, with production expenses declining 1% to $9.91/unit driven by operational efficiency gains and the benefits of scalable production growth in the Delaware Basin.

The company expects Q4 output of 583K-601K boe/day and expects to maintain FY 2022 production of 570K-600K boe/day, with $1.9B-$2.2B in capital spending on its upstream operations.

Devon's free cash flow generation increased 8-fold from the fourth quarter of 2020 to $1.1B, while the balance sheet strengthened with cash balances increasing by $782 million to a total of $2.3 billion.

Related: Aramco CEO: Underinvestment In Oil Is A ‘’Huge Concern’’

Devon Energy increased its fixed-plus-variable dividend payout by 71% to $0.84/share and also authorized a $1B stock buyback program. The company says the top priority for its free cash flow generation will continue to be the funding of its fixed-plus-variable dividend and distribute up to 50% of the remaining free cash flow to shareholders through a variable dividend.

DVN shares are up 176% YTD.

#3. Diamondback Energy

Diamondback Energy (NASDAQ:FANG) has posted Q3 revenue of $1.91B (+165.3% Y/Y) beating Wall Street's consensus by $430M while GAAP EPS of $3.56 beat by $0.73.

The company's Q3 2021 average production clocked in at 239.8 MBO/d (404.3 MBOE/d), with Q3 2021 Permian Basin production averaging 223.0 MBO/d (374.3 MBOE/d).

Q3 2021 cash flow from operating activities came in at $1,199 million; Operating Cash Flow was $1,131 million while Free Cash Flow was $740 million.

Diamondback has announced a commitment to return 50% of free cash flow to stockholders beginning in Q4 2021. To this end, the company raised its dividend 11% to $0.50 per share, marking the second consecutive quarterly increase after hiking by 12% in the second quarter. The company's board has also authorized a $2 billion share repurchase program as part of this commitment.

For the full year, FANG expects production to clock in at 222 - 223 MBO/d (370 - 372 MBOE/d), up from its previous guidance of 219 - 222 MBO/d (363 - 370 MBOE/d). The company has also lowered its full-year 2021 cash CAPEX guidance to $1.49 - $1.53 billion, down 4% at the midpoint from $1.525 - $1.625 billion previously.

FANG shares have rallied 133% YTD.

#4. EOG Resources

EOG Resources (NYSE:EOG) has reported Q3 revenue of $4.78B (+103.4% Y/Y), beating by $430M while net income of $1,095M represented a big jump from a $42M loss recorded in Q3 2020. Meanwhile, GAAP EPS of $1.88 narrowly missed by $0.01 but was a big improvement from last year's $0.07 loss.

EOG generated $1.4 billion of free cash flow and announced that capital expenditures came near the low end of guidance range driven by sustainable cost reductions.

EOG said total company crude oil production of 449,500 Bopd was above the high end of the guidance range due to better well productivity. 

EOG Resources has declared a $0.75/share quarterly dividend, good for an 81.8% increase from prior dividend of $0.41. The company also declared a special dividend of $2.00 per share, payable on December 30; for stockholders of record on December 15.

"Our high-return investment program... has positioned the company to step up our cash return to shareholders,should also be taken as a signal of our confidence that we can continue improving in the future. EOG has never been in better shape. Our high-return business model is sustainable for the long term, underpinned by a deep inventory of double premium drilling locations," EOG CEO Ezra Yacob told shareholders during the company's earnings call.

#5. Occidental Petroleum

Occidental Petroleum (NYSE:OXY) has become the latest shale patch producer to post an easy earnings beat on the strength of high oil and gas prices. The Texas company–which eschews wildcatting in favor of an oil recovery model–reported Q3 Non-GAAP EPS of $0.87 beats by $0.20 while GAAP EPS of $0.65 was in-line with expectations. 

OXY reported that cash flow from continuing operations clocked in at $2.9 billion, capital spending was $656 million, while free cash flow excluding working capital came in at over $2.3 billion.

The company exceeded production guidance midpoint by 15 Mboed, despite the impact of Hurricane Ida, with production of 1,160 Mboed from continuing operations. Meanwhile, OxyChem generated record earnings and increased total year pre-tax guidance to $1.45 billion

Occidental also announced that it had completed its large-scale divestiture program with the sale of Ghana in October; repaid $4.3 billion of long-term debt and retired $750 million of interest rate swaps.

OXY shares have gained 95% YTD.

By Alex Kimani for Oilprice.com

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