Daily Energy Blog

We’re now in the midst of the summer vacation season, but a recent survey showed that just two out of five Americans are planning a trip that requires a flight and/or hotel stay — the fact is, inflation has whittled away at discretionary income. U.S. E&P companies are in a similar boat. After a brutal decade marked by intense commodity price volatility, oil and gas producers over the past couple of years have won back investors with a new fiscally conservative approach that prioritizes harvesting free cash flow to fund surging shareholder returns. But more recently, lower commodity prices and persistent inflation have significantly eroded the funds available for dividends and share repurchases. In today’s RBN blog, we analyze the increasingly difficult cash allocation decisions oil and gas producers made in Q1 2023 and are likely to face in future quarters.

U.S. E&P companies engineered a spectacular recovery from the near financial disaster brought on by the pandemic. They rode a rising tide of commodity prices to generate record profits and cash flows that peaked in mid-2022 when West Texas Intermediate (WTI) crested at $114/bbl in May and natural gas prices breached the $9/MMBtu mark in August. But sustaining that level of return has been an uphill battle against commodity prices that have fallen off significantly from their peak as well as persistent inflation that has burdened the entire economy. In today’s RBN blog, we analyze the impact of this battle on the Q1 2023 results of oil and gas producers and provide an outlook for Q2.

There’s been a lot of talk over the last year or so about U.S. E&Ps exerting financial discipline by moderating their investments in growth, paying down debt and returning substantial portions of their free cash flow to investors in the form of dividends and stock buybacks. So, worries in the broader economy that the banking crisis and the specter of a looming recession may restrict access to capital markets shouldn’t be a major concern for the 41 oil and gas producers we monitor, right? As we discuss in today’s RBN blog, the answer isn’t a simple yes or no. The bad news is that the E&P sector still holds quite a bit of debt and that several of the companies we track added to their debt load in 2022. The good news is that total debt levels are down and that the net present value (NPV) of oil and gas reserves — a key factor in determining how much debt an E&P can handle — has soared, which may make it easier for them to borrow money if they need it.

It would be an understatement to say we’re sensing a trend here. Over the past couple of years, there’s been an absolute frenzy of producer M&A activity in the Permian, much of it involving big E&Ps getting bigger and private equity cashing in on assets they’ve been developing since the 2010s. The latest multibillion-dollar deal involves Ovintiv, whose recently announced plan to acquire the Midland Basin assets of three EnCap Investments-backed producers will nearly double Ovintiv’s oil and condensate output in West Texas, lower its per-barrel production costs, and add more than 1,000 well locations to its inventory. Oh, and via a separate but related deal, Ovintiv will exit the Bakken by selling its assets there to another EnCap affiliate. In today’s RBN blog, we look at what the M&A artist formerly known as Encana is up to.

Last August, we titled our review of Q2 2022 E&P financial results Camelot after rising oil prices and surging natural gas realizations drove revenues, profits and cash flows to levels that seemed like an unrealizable dream for producers that had teetered on the brink of financial instability just two years before. Recent year-end results revealed the strongest returns in the industry’s history, much of which were distributed to long-suffering shareholders. But dreams fade and prices retreat, and Q4 2022 results suggest a far less idyllic 2023. In today’s RBN blog, we review the record 2022 performance and more sobering Q4 results.

Punxsutawney Phil presaged six more weeks of winter when he saw his shadow on February 2, the famous groundhog’s annual attempt to predict the arrival of spring that garners national headlines, despite his dismal 39% success rate over the last 150 years. Although we haven’t turned to rotund rodents, we spend a lot of time exploring ways to predict energy industry trends. A far more reliable way to gain early insights into E&P spending and production patterns is by analyzing the year-end results and forecasts issued by the major oilfield services firms, which release their year-end reports well before E&Ps typically do. In today’s RBN blog, we review the data and insights from the reports and conference calls of the major firms that are in constant communication with the major oil and gas producers.

One of life’s vicarious pleasures is indulging in some daydreaming about what we’d do with a substantial financial windfall, maybe from a lottery win, a bequest from a long-lost relative, or a five-horse parlay. Thanks to a dramatic surge in post-pandemic commodity prices, U.S. E&Ps are living out that dream as 2022 cash flow from operating activities (CFOA) is on track to quadruple from 2020 lows and more than double from pre-pandemic levels. In allocating those funds, producers face the same kinds of decisions we would all face: ramping up current spending, whittling away at debt, tucking cash away for a rainy day, or distributing funds to family and friends. Possibly influenced by the upcoming holiday season, oil and gas producers turned extremely generous in the third quarter as shareholder returns reached record levels. In today’s RBN blog, we detail the cash-flow allocations made by the 42 publicly owned E&Ps we follow and speculate on future trends.