Oil markets have been pushed higher by supply disruptions and geopolitical tensions, while natural gas prices have strengthened on weather-driven demand, reinforcing a powerful near-term earnings tailwind. The question is a familiar one: What will producers do with these additional cash flows?
It’s been a busy few years for big-money M&A in the oil and gas industry. Now, having acquired their targeted assets — often running up debt in the process — several E&Ps have been selling off non-core holdings and, with those deals, zeroing in on the shale basins they see as the keys to their success.
The fact is, many major E&P acquisitions include at least some production assets that don’t align with the acquiring company’s long-term strategic plans. Also, it’s often true that big-dollar M&A increases the buyer’s debt level — and it’s typical in such cases that the company commits to quickly reducing its debt through the divestiture of non-core assets. As we discuss in today’s RBN blog, there’s a lot of that going on now, and in many cases smaller, private-equity-backed producers are scooping up the acreage and production being sold.
Growth for growth’s sake. In the early years of the Shale Revolution, that’s what it was all about. Backed by billions of dollars in Wall Street borrowings, E&Ps plowed vast piles of cash into increasing production. It was the era of “Drill baby drill!” And we all know what happened next. Rabid production growth contributed to oversupply and crude oil prices crashed. But resilient E&Ps clawed their way back by adopting what we now know as capital discipline, initially in fits and starts. Then, after the COVID price meltdown, they went all-in, elevating free cash flow generation to Job #1 and returning a significant portion of cash flow to shareholders. It worked! Financial markets started to think of E&Ps more as yield vehicles than growth plays. But it is in the DNA of oil and gas producers to grow. And now that U.S. crude prices are above $85/bbl, could we see a backslide toward organic growth — a 2024 rendition of “Drill baby drill”? In today’s RBN blog, we’ll explore the historical context of E&Ps’ transition to capital discipline and what it tells us about what’s coming next.
It may be considerably smaller in scale than the recent ExxonMobil/Pioneer and Chevron/Hess megadeals, but Occidental Petroleum’s announcement that it will acquire privately held CrownRock LP for $12 billion is remarkable in its own right. Among other things, the deal will give Delaware Basin-focused Oxy a strong foothold in the absolute core of the Midland Basin, supercharge its free cash flow and — despite increasing Oxy’s debt in the short term — provide a pathway for the company to return much more money to shareholders via dividends and stock buybacks in the years ahead. In today’s RBN blog, we examine Oxy’s planned acquisition of CrownRock and what it means for the acquiring company and the Permian itself.
Despite dreams of a white Christmas and a “soft landing” for the U.S. economy, there’s a lot going on in the world — much of it upsetting and even gut-wrenching. As for energy, crude oil prices have been sagging after a brief rise and natural gas prices, while up from their lows, remain less than stellar — and it seems things could get far worse in the blink of an eye. All of that has combined to make folks cautious and wary, and that’s impacting how oil and gas producers spend — or hoard — their money. In today’s RBN blog, we analyze U.S. E&Ps’ increasingly conservative cash allocation despite rising returns in Q3 2023.
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.
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.
The saying goes, “If you got it, flaunt it,” and the rise of social media has certainly accelerated the ostentatious display of sudden wealth by rock stars, rappers, tech billionaires, star athletes and others. While it might be unseemly for executives at oil and gas companies to indulge in bling from gold chains to $400,000 Maserati GranCabrios to half-billion-dollar mega-yachts, they weren’t shy about displaying their companies’ financial gains last year from surging commodity prices in the form of lavish shareholder returns that in some cases dwarf returns from the traditional dividend giants. In today’s RBN blog, we’ll detail the extraordinary 2022 returns allocated to oil and gas investors and discuss the warning signs that 2023 will be a leaner year.
Champagne corks were popping in E&P boardrooms and executive suites over the past few weeks as they unveiled record-high second-quarter 2022 earnings and cash flows. The strong financial results in the near-idyllic quarter — pre-tax operating earnings and cash flows surged by 29% and 22%, respectively, from the already elevated Q1 2022 levels — were driven by soaring commodity prices and producers’ strict financial discipline. And the celebrations weren’t limited to E&P headquarters. Shareholders have also benefited as companies passed on the unprecedented largess to their investors. In today’s RBN blog, we analyze how U.S. oil and gas producers distributed their soaring free cash flows and discuss the underlying corporate strategies.
