RBN Energy

Out of the long, brutal struggles to create a British nation in the Medieval Ages arose the legend of Camelot, an idyllic kingdom that for a “brief shining moment” enabled its inhabitants to bask in peace and prosperity. In the second quarter of 2022, U.S. oil and gas producers that had, for the last two decades, been roiled with severe price volatility, recession, environmental pressures, investor hostility and a pandemic, finally found their Camelot. Rising oil prices and surging natural gas realizations drove per-unit revenues to a 15-year high, and nearly nine out of 10 of the incremental dollars fell straight to the bottom line as producers successfully wrangled inflation to keep costs under control. The result was E&P coffers overflowing with record earnings and cash flows. However, Camelot, in the words of the 1960 musical, was “a fleeting wisp of glory,” and clouds are emerging on the horizon for U.S. E&Ps in the third quarter. In today’s RBN blog, we catalog Q2 2022 results and preview the issues that could impact third-quarter earnings.

We’ve written a lot lately about how U.S. E&Ps, whipsawed over the last decade by extreme price volatility and negative investor sentiment, have adopted a new fiscal discipline that de-emphasizes production growth and prioritizes generation of free cash flow to reduce debt and reward shareholders. But what about midstreamers? They too have been buffeted in recent years by volatile commodity prices, eroding investor support, shifting upstream investment patterns, and finally, a global pandemic. Midstream companies face a different set of challenges than oil and gas producers in repairing their balance sheet and restoring investor confidence, however, mostly because midstream investment decisions are determined both by downstream market changes and by E&Ps’ development and production activity — including producers’ ever-increasing focus on the Permian at the expense of other basins. In the encore edition of today’s RBN blog, we discuss highlights from RBN and East Daley’s Spotlight Report on Western Midstream Partners and how the master limited partnership has been working to reduce its debt and make the most of its strong base in the Permian’s Delaware Basin.

We’ve written a lot lately about how U.S. E&Ps, whipsawed over the last decade by extreme price volatility and negative investor sentiment, have adopted a new fiscal discipline that de-emphasizes production growth and prioritizes generation of free cash flow to reduce debt and reward shareholders. But what about midstreamers? They too have been buffeted in recent years by volatile commodity prices, eroding investor support, shifting upstream investment patterns, and finally, a global pandemic. Midstream companies face a different set of challenges than oil and gas producers in repairing their balance sheet and restoring investor confidence, however, mostly because midstream investment decisions are determined both by downstream market changes and by E&Ps’ development and production activity — including producers’ ever-increasing focus on the Permian at the expense of other basins. In today’s RBN blog, we discuss highlights from RBN and East Daley’s Spotlight Report on Western Midstream Partners and how the master limited partnership has been working to reduce its debt and make the most of its strong base in the Permian’s Delaware Basin.

The 43 large U.S. E&Ps that we monitor posted record earnings in 2021 and tripled their cash flow — an extraordinary turnaround from a very tough 2020. But as big a story, at least for investors, is how those oil and gas producers are allocating their surging cash reserves. Their dramatic strategic transformation from growth at any cost to maximizing returns is expected to result in 2022 yields approaching 10% for some E&Ps, rates higher than the much broader S&P 500 sector and more than double the payouts of the oil majors, the former dividend kings. In today’s RBN blog, we discuss the cash-flow allocation of the major E&P companies and explain what it means for investors.

The Biden administration’s March 31 announcement that it will release an average of 1 MMb/d of crude oil from the Strategic Petroleum Reserve over the next six months was an acknowledgement of sorts that U.S. E&Ps won’t be ramping up their production enough in the near term to bring down oil or gasoline prices. It seems like a good assumption because, while the 40-plus crude oil and natural gas producers we monitor have indicated they are planning a 23% increase in capital spending this year and an 8% increase in production, further examination reveals that those numbers are somewhat misleading — the real gains will be significantly smaller. In today’s RBN blog, we scrutinize producers’ spending plans and production outlooks by peer group and company-by-company.

Amid all the energy-market excitement of the past few months — the soaring demand for LNG, the march to $100/bbl crude oil, sky-high propane prices, and the like — there also has been a continuing consolidation and repositioning in the U.S. midstream sector. While midstream M&A activity has been all over the map, literally and figuratively, it also has revealed discernible themes, chief among them a push to increase the scale and efficiency of gathering systems. Also evident is the desire to expand into growing production areas and, for some energy giants, to either buy out stakes held by joint venture partners or absorb midstream master limited partnerships they had spun off a few years ago. In today’s RBN blog, we discuss a variety of recent midstream deals and what they tell us about 2022’s energy market.

Any time there’s a step-change in technology, it presents intrepid industrialists with tremendous opportunities. Just looking at U.S. history, this has played out many times, with railroads, oil, automobiles, computers, and the internet being a few obvious examples. The Shale Revolution provided significant opportunities of its own, not just for the savviest producers but for midstreamers who jumped at the chance to develop the pipelines, gas processing plants, fractionators, and other infrastructure that was desperately needed to transport and process rapidly growing volumes of crude oil, natural gas, and NGLs. Master limited partnerships (MLPs) led the way, boosted by their advantaged access to capital, but they got an important assist from private-equity-backed developers, who were willing to take big risks in the hope of creating successful businesses. In today’s RBN blog, we continue our look at midstream dealmaking — and midstreamers’ prospective role in the coming lower-carbon economy — this time with a focus on the private equity (PE) side.