U.S. Shale Swings From Losses To Record Cash Flows
After years of plowing money into boosting production and thus depressing oil prices, the U.S. shale patch emerged from the pandemic-inflicted slump with unwavering capital discipline which, combined with $100+ oil, is paying off with record cash flows for American oil producers. The largest shale producers have left years of bleeding cash behind, focusing on returning capital to shareholders from the record cash flows they have been generating for several months now. As they report first-quarter figures these days, public companies vow continued disciplined spending and only modest production growth as “drill, baby, drill” is no longer shale’s primary goal. Investors, in turn, are rewarding the discipline—most of the 20 top-returning firms in the S&P 500 year to date are oil companies, including Occidental, Coterra Energy, Valero, Marathon Oil, APA, Halliburton, Devon Energy, Hess Corporation, Marathon Petroleum, ExxonMobil, ConocoPhillips, Chevron, Schlumberger, EOG Resources, and Pioneer Natural Resources. As a result of the highest oil prices since 2014 and capex discipline, the shale patch is on track for massive free cash flows of a combined $172 billion in 2022 alone, per Deloitte estimates cited by Bloomberg. By 2020, the shale industry had booked $300 billion in net negative cash flow in the 15 years since the first shale boom, Deloitte estimated back then. Unlike in the previous upcycles, U.S. producers are now directing a large part of the record cash flows to boost shareholder returns with higher dividends, special dividends, and share buybacks. U.S. producers do not plan to abandon the newly-found capital discipline and will grow production only modestly, the top executives at most public shale producers said during the Q1 earnings calls this week. Many firms acknowledged the supply chain, inflationary, and labor constraints that could result in slower American oil production growth than the increase the EIA and analysts expect. Producers are also wary of the Biden Administration’s calls for only a short-term ramp-up in production amid otherwise negative comments on the oil industry, which undermines the firms’ visibility and willingness to plan higher investments in the medium term. “To say bluntly, the administration’s comments are certainly causing a lot of uncertainty in the market, both in the terms of regulatory taxation, legislation, and negative rhetoric toward our industry. And that creates uncertainty in our owners’, our shareholders’ minds about what the future of this industry really is,” Diamondback Energy’s CEO Travis Stice said on the earnings call this week. Diamondback Energy will keep its current oil production levels of 220,000 net barrels of oil per day, Stice said. “While we believe that efficiently growing our production base is achievable over the long term, we do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels into multiple quarters from now,” he added. Another producer, Devon Energy generated $1.3 billion of free cash flow for the first quarter, its highest-ever quarterly FCF. “With this increasing amount of free cash flow, our top priority is to accelerate the return of capital to shareholders,” CFO Jeff Ritenour said. Continental Resources “delivered a record quarter of adjusted earnings per share and exceptional free cash flow generation,” CFO John Hart said as the shale giant announced a fifth consecutive increase to quarterly dividend. Chesapeake Energy, which went through a bankruptcy during 2020, reported $532 million in adjusted free cash flow for Q1, its highest quarterly FCF ever, and launched a $1-billion share and warrant repurchase program. Pioneer Natural Resources, for its part, will be returning 88% of its first-quarter free cash flow of $2.3 billion to shareholders, while keeping disciplined oil growth of up to 5%, CEO Scott Sheffield said. It was Sheffield who said as early as in February: “Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans.” In Pioneer’s earnings call this week, Sheffield said that U.S. shale would likely grow less than the EIA and other analysts expect, which would put upward pressure on oil prices. “What’s happening now in regard to labor constraints, frack fleet constraints, inflation constraints – I just think it’s going to be tough to hit some of the numbers. It even makes me even more bullish about some of the oil price numbers that are out there,” Sheffield said, as carried by Reuters. Sheffield sees U.S. oil production growing by 500,000 bpd-600,000 bpd this year, compared to EIA and other estimates of 800,000 bpd-1 million bpd growth. Added to operational constraints and capital discipline is the industry’s frustration with the Biden Administration, which producers say has singled out oil firms to blame for the highest gasoline prices in eight years, while calling for a short-term jump in production. Democratic lawmakers even said last week they would propose legislation to allow state and federal agencies to “go after” oil companies. Senate Majority Leader Chuck Schumer compared oil firms to “vultures” booking record profits and using the COVID and Ukraine tragedies for market manipulation. “Talk about mixed messages. We can’t treat the oil and natural gas industry as a kind of light switch that is turned on or off to suit the political moment,” American Petroleum Institute (API) President and CEO Mike Sommers said this week. “It can be easy and fashionable to speak as if we hardly even need oil or natural gas anymore. But then disruptions occur, and once again everybody is staring down the truth. Now, suddenly, some policymakers want to flip the switch “on” again, but only for a short time. And as practical realities intrude, mostly what we hear from Washington is blame-shifting and excuses,” Sommers added.
Pincer grip of rising domestic cooking gas price
The steep hike in the price of domestic cooking gas has poured salt into the wounds of people already struggling to make ends because of the rising cost of living. After an overnight hike of Rs 50, the public sector oil marketing companies have priced a 14.2kg refill in Kolkata at Rs 1,026. For many, like Rita Singh, hikes such as these have meant a gruelling return to firewood as the medium of cooking. The 46-year-old domestic help lives with her husband and son in Narendrapur, on the southern fringes of Kolkata. She works at four houses in Patuli, earning around Rs 5,000 a month. Her husband paints houses but his income is not fixed. Two years ago, LPG was the sole cooking medium at her kitchen. Now, everything but rice is made on firewood. On most days, the meal includes rice, dal and/or a sabzi. “Even when I make fish or meat, I use firewood. This way, I try to spend three months with two cylinders. Otherwise, it is becoming impossible to survive,” said Singh. Cooking with wood entails a lot of time, smoke, incessant coughing and breathing problems. But it saves money. She often sources the wood from discarded furniture of employers. Singh summarised the pincer grip of rising costs. “Two years ago, my income was more and prices were comparatively lower. Now, the prices of everything have gone up. But the income has come down,” she said. Before the pandemic, she worked at “around 10 homes”. She earned almost double and was short of time. LPG was the best bet then. Back then, her husband would go to work at least 15 days a month. Now, the number has come down to barely eight. Now, Singh walks between home and the station, even under the burning sun, because she can save Rs 20 (Rs 10 two times a day). Several Kolkatans who have switched to firewood told Metro that the latest hike in prices of LPG only vindicated their stand and there was no question of going back. Shyamali Dutta, another domestic help living off Swinhoe Lane near Kasba, is one of them. Her monthly income is also Rs 5,000. Dutta’s husband, an electrician, was hit hard by the pandemic and was yet to get back to his normal working schedule. Dutta has been using wood and cow dung cakes as cooking fuel though she has an LPG connection. Even six months ago, she had been cooking rice on firewood and the sides with LPG. Now, firewood is almost the sole cooking medium. “Only tea and an occasional meal for the children is made with cooking gas. It is also used when we have guests and multiple dishes have to be cooked. That way, I can save one cylinder every month,” said Dutta. “Now, with another hike of Rs 50, the decision (not to use LPG) seems inevitable,” she said. In a family of nine with minimal income, Rs 1,000 a month is a substantial saving.
Reliance expects gas prices to rise again in Oct
Reliance Industries Ltd expects prices of natural gas in India to rise again in October as its gas exploration business reaps the rewards of a global surge in energy prices that have already pushed the rates to a record high. The conglomerate, controlled by billionaire Mukesh Ambani, expects the price cap for its KG-D6 gas sales to rise over the current USD 9.92 per million British thermal units, Sanjay Roy, senior vice-president for exploration and production, said in an investor call following the announcement of its quarterly earnings on Friday. The government sets gas prices every six months based on international rates. The price of gas from old or regulated fields was more than doubled to a record USD 6.1 per mmBtu from April 1 and that for difficult fields like those lying in deepsea to USD 9.92. per mmBtu. Rates are due for a revision in October. It is anticipated that the price of gas from old fields of state-owned Oil and Natural Gas Corporation (ONGC) will be hiked to about USD 9 per mmBtu and the cap for difficult fields will rise to double digits. ”In fact, we have also seen prices rise, as we know the gas markets are quite tight and prices have been elevated, and that effect we are seeing now in the revenues as well as improved EBITDA margins,” Roy said. ”Now, going forward, we expect ceiling prices to increase to USD 9.92 in the first half (of current fiscal that began on April 1) – that has been notified. And further, we expect increases going from there onwards in the second half of the year.” Reliance and its partner bp plc of UK produce about 18 million standard cubic meters per day of gas from two sets of new fields in the eastern offshore deepsea block KG-D6. Higher gas prices have helped the company’s EBITDA (pre-tax profit) from oil and gas exploration and production business to climb to a seven-year high. Revenue from the segment rose 3.5 times to Rs 74.92 billion in 2021-22 (April 2021 to March 2022) fiscal while EBITDA surged 21 fold to Rs 54.57 billion. Reliance-bp, who commissioned R-Cluster field in December 2020 and Satellite fields in April 2021, are targeting to start production from MJ field in the same block by the end of the year. After MJ starts, production is expected to reach 30 mmscmd in 2023.