Editor-News
More and more, industry reports note that US shale producers will, in earnest, pivot to returns-focused business models over unbridled growth if oil prices hold steady or increase. Many times, in business and in life, circumstances change and a shift is in order.
The Shale Revolution, spurred by a resourceful and adaptable group of players, brought about remarkable increases in crude oil production. That production, coupled with an attempt by the Organization of Petroleum Exporting Countries to maintain market share, played a hand in the oil price collapse. OPEC and allies agreed to curb output and prices have stabilized and are ticking upward.
Production growth continues and crude oil available on the world market is attributed to a surge in US shale production. US oil production reached 9.78 million b/d for the week ended Dec. 8, 2017, according to the US Energy Information Administration. If OPEC and allies adhere to the extended curtailment, a balanced market-and even an outstrip of supply-could result. But it could also entice shale players to increase production. There are, however, indications of a shift in financial discipline, at least in theory, following years of industry volatility.
Bold statements
In September 2017, in announcing a $2.5-billion share-repurchase program, Anadarko Petroleum Corp. Pres. and Chief Executive Officer Al Walker made a bold statement. "Going forward, we will continue to demonstrate financial discipline with a focus on returns. Our 2018 upstream investment plan is anticipated to produce substantial free cash flow, assuming an average oil price of $50/bbl, while total capital spending, including midstream investments, should be approximately break-even to discretionary cash flow from operation."
Speaking as part of a panel in January, Justin Stolte, a partner at Gibson, Dunn & Crutcher, reiterated the idea. "Publicly traded E&Ps [exploration and production firms] are under the understanding that they need to demonstrate capital discipline to their investors. You won't see a bunch of companies, in my view, with long rig lines based on prices in the $60s…I think we'll continue to see capital discipline, and, as a result, I don't think you'll see a flood of unconventional production coming into the market," he said.
Raymond James & Associates Inc. analysts, in a January brief, also noted the shift, pointing to subsequent changes needed for the industry.
"The age-old perception of E&Ps outspending cash flow with the intention of maximizing growth is under attack as investors take a more returns focused approach to the E&P space. While it's still a bit early, preliminary 2018 capital plans announced by companies so far appear to reflect the changing sentiment in the newfound debate between production growth and returns," they said.
"While we believe that an increased focus on capital efficiency will be healthy-bringing more stability and prudency to the industry-we also think that, if E&P companies do end up making a true, sustained commitment to a returns-focused, [free cash flow] generation business model, then investors will ultimately need to change their approach to valuing the group," the analysts said.
"If investors don't reward companies with lower discount rates and higher multiples going forward then there will be zero incentive for companies to pursue this newfound, capital disciplined strategy. If investors remain open/receptive to this transition period, and become comfortable with this new valuation paradigm, overall, we think that these changes would not only offset the negative implications from a lower development pace (on trading multiples and NAVs), but also help foster a healthier industry and entice additional capital investment from investors seeking more stable/predictable returns," they said.
It all matters
Capital plans, investors, valuations, and cash flow are words and phrases held close for many years as an editor for Oil & Gas Journal's sister publication, Oil & Gas Financial Journal. Producers and the investment community coalesce…a reality that runs parallel to this editor's shifting focus from oil and gas finance to operations. And with it, a promise to be resourceful and adaptable all the while consuming analysis and investment community news. Because it all matters. Hello OGJ.
