Daily Energy Blog

Rapidly rising prices for goods and services have plagued the economy since the onset of the pandemic — and led the Federal Reserve to ratchet up interest rates to help cool things off. Despite strong signs that overall inflation is receding, the negative impacts are far from over. Like every other sector, the U.S. E&P industry faced soaring costs as it struggled to restore production after widespread shut-ins in the spring of 2020. However, in recent Q2 2023 earnings calls E&P executives provided guidance that suggested that costs had not only plateaued but might actually decline in 2024 and beyond. In today’s RBN blog, we discuss updated 2023 capital spending guidance for U.S. oil and gas producers and their early outlook for 2024 investment.

Is the glass half-full or half-empty? The answer to that age-old question usually indicates whether a particular situation is a cause for optimism or pessimism. That question is particularly appropriate when trying to place in perspective the cyclical movement of the earnings and cash flows of U.S. exploration and production (E&P) companies, including returns that have steadily declined with commodity prices over the last year. In today’s RBN blog, we analyze Q2 2023 E&P earnings and cash flows and provide some perspective on the past and future profitability of U.S. oil and gas producers.

The M&A boom in the Permian and Eagle Ford continues unabated. Lately, a multitude of E&Ps have built scale and increased profitability by acquiring other producers that control acreage and produce crude oil, natural gas and NGLs themselves. But it’s also possible for an E&P to boost its holdings by acquiring incremental working interests in its operated assets or by having an affiliate acquire royalty and mineral interests in acreage the producer plans to develop. In today’s RBN blog, we discuss the most recent M&A activity in two of the U.S.’s leading production areas, including Viper Energy Partners’ planned $1 billion purchase of mineral and royalty interests in the Permian; Crescent Energy’s plan to acquire incremental working interests in South Texas; and an old-school, bolt-on acquisition by Magnolia Oil & Gas, also in the Eagle Ford.

What a difference a year makes! The summer of 2022 was a golden age for U.S. E&Ps that embraced a dramatic shift in their business model from prioritizing growth to a focus on maximizing cash flows and emphasizing shareholder returns. Oil prices over $90/bbl and gas prices hovering about $7/MMBtu filled their coffers and funded lavish increases in share repurchases and dividends. But those golden days quickly faded as oil prices retreated and gas prices plunged 66% to just above $2/MMBtu. In today’s RBN blog, we explain how E&Ps are scrambling to sustain shareholder return programs in the face of shrinking cash flow.

It’s only natural that deals like Chevron’s $7.6 billion acquisition of PDC Energy and ExxonMobil’s $4.9 billion purchase of Denbury grab the market’s attention. After all, the buyers are names known to everyone — even those who only think about hydrocarbons when they’re filling up at their local gas station. But a lot of other, lower-profile M&A action is happening too, especially in the Permian and also in the Eagle Ford. You might say these are cases of “Eat or be eaten” — or, in one recent case, “Eat and be eaten.” In today’s RBN blog, we discuss the plans by Permian Resources to acquire Earthstone Energy; Civitas Resources to buy assets in the Permian’s Delaware and Midland basins from Tap Rock Resources and Hibernia Resources, respectively; and SilverBow Resources to scoop up Chesapeake Energy’s last remaining assets in the Eagle Ford.

Over the past four years, Energy Transfer (ET) has completed several major acquisitions, all aimed at giving the company the additional size and reach it will need to compete in an increasingly consolidated midstream sector. On Wednesday, ET announced one of its biggest purchases yet: a $7.1 billion deal to acquire Crestwood Equity Partners, which has extensive gathering and processing assets in the Permian, Powder River and Williston basins, as well as NGL terminal and storage facilities east of the Mississippi. In today’s RBN blog, we look at how the addition of Crestwood’s holdings will extend ET’s value chain and complement its fractionation assets at Mont Belvieu and its export capabilities at both its Nederland and Marcus Hook terminals.

Unlike most of us, CEOs and other senior executives at U.S. oil and gas companies derive the lion’s share of their compensation not from salaries, but from bonus and incentive programs tied to performance targets set by their boards of directors. So it’s no surprise that the dramatic strategic shift implemented by U.S. E&Ps and integrated energy companies over the last decade has been steered by an equally dramatic change in their compensation incentives. In today’s RBN blog, we review how top executives at oil and gas companies are compensated and analyze the shift in the incentives they are motivated to meet.

On average, the landowners and other entities that own mineral and royalty interests in producing oil and gas wells receive about 20% of the gross revenues generated by those wells — and do so without any responsibility for the significant costs and complications associated with well development and production. Mineral and royalty interests have traditionally been a highly fragmented market, with most held and passed down through generations by landowners or purchased by individual investors. However, competition for these interests has become more heated in recent years with the creation of large publicly owned and private-equity-funded consolidators and a new emphasis by E&P companies on adding these higher-margin slices of revenue from leases they own and operate. In today’s RBN blog, we explain mineral and royalty interests and analyze the developments in this massive $700 billion market.

The wave of Permian corporate consolidations has continued unabated as spring transitioned into summer with the public company purchases of two EnCap-funded Delaware Basin private operators: Forge Energy, which was purchased by Vital Energy for $540 million, and Novo Oil & Gas, which was purchased by Earthstone Energy for $1.5 billion. Although the theme hasn’t changed, the funding of the transactions includes an intriguing new element — Northern Oil & Gas, which primarily invests in non-operated minority interests, partially funded the acquisitions by agreeing to take 30% and 33% interests in the assets from buyers Vital Energy and Earthstone Energy, respectively. In today’s RBN blog, we review the emergence of three public non-op-focused E&Ps — Northern Oil & Gas, Granite Ridge Energy and Vitesse Energy — and their recent evolution from consolidators of asset packages to trusted partners of acquisition-focused operators.

The Fiscal Responsibility Act (FRA) — whose primary purpose was to increase the federal government’s debt ceiling — addressed some immediate priorities surrounding federal permitting for energy and infrastructure projects and sought to expedite completion of the long-delayed Mountain Valley Pipeline (MVP), but it did more than that. Its passage provided a ray of hope for those eager for a renewed focus on permitting issues while also serving to underscore all the progress that is still needed. In today’s RBN blog, we look at the other key sections of the FRA, where Congress could look next to address permitting reform, and why additional progress might be hard to achieve.

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.

The headwinds facing producers in the Permian, the Eagle Ford and other shale plays are trimming the valuations of oil and gas assets and making it easier for deep-pocketed acquirers and private-equity-backed sellers to reach deals. For proof, look no further than the ongoing frenzy of M&A activity in South and West Texas, where large and medium-size E&Ps alike continue to gobble up smaller producers with complementary assets. Their goals are one and the same: increase scale, improve efficiency, cut costs and build inventory in highly productive plays with easy access to Gulf Coast refineries, fractionation plants, and export docks for oil, LNG and NGLs. In today’s RBN blog, we discuss the most significant deals in the Lone Star State so far this spring and what they mean for the acquiring companies.

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.

The feeling is almost palpable among midstreamers: In a fast-changing energy industry, the companies that gather, transport, store and export hydrocarbons need to consolidate and augment — and be smart about how they get bigger. Scale, that’s the key. That — plus complementary assets that provide synergies, lower costs and increase free cash flow, a sizable portion of which can be returned to shareholders as dividends and buybacks — is what investors are looking for. Oh, and don’t forget this important M&A goal: gaining a larger footprint and a more prominent role in the Permian, the dominant U.S. production area. ONEOK, a midstream company heretofore primarily focused on moving NGLs and natural gas, earlier this week announced an $18.8 billion agreement to acquire Magellan Midstream Partners, which is best known for pipelines that transport refined products and crude oil. In today’s RBN blog, we and our friends at East Daley Analytics kick the tires, look under the hood, and give our thoughts on the deal’s pros and potential cons.

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.