After a decade of losses and shareholder frustration, the U.S. shale play is generating record cash flow and posting record profits this year as oil prices soar as companies prioritize returns on investment.
American independent public shale producers already had a first quarter blockbuster, many of which are generating record cash flow and earnings and promise to boost shareholder returns after years of corporate losses and little return on investment for investors. Additionally, analysts say the second quarter will be even better for the shale patch.
Early earnings results reported late last week and earlier this week suggest the second quarter will be the best quarter for shale earnings ever. Independent producers join Big Oil, including the United States supermajors ExxonMobil and Chevron— declaring record profits and increasing shareholder payouts through higher dividends and intensified share buybacks.
The record cash flow and profits are unlikely to go unnoticed by the Biden administration, which has chastised domestic oil producers for rewarding shareholders instead of “cutting costs at the pump for Americans.”
Phenomenal cash flow
The combined free cash flow of the top 28 independent U.S. oil producers is expected to exceed $25 billion in the second quarter, according to estimates compiled by Bloomberg shown at the start of the shale earnings season. Free cash flow is expected to exceed $100 billion for the full year of 2022, more than double the FCF the shale parcel generated last year. The projected FCF for this year will also be nine times greater than the combined annual cash flows between 2018 and 2020, according to data from Bloomberg Intelligence.
“Even if the cost structure tends to increase, the amount of free cash flow generated will be phenomenal,” Paul Cheng, a New York-based analyst at Scotiabank, told Bloomberg.
Production in the U.S. shale play is also growing, but at a slower rate than in the 2018-2019 period that preceded the pandemic. This is not just due to spending discipline where companies prefer to reduce debt and repay shareholders instead of increasing production at any cost, as they did for nearly a decade before COVID hit. creates a new crisis and a new reality. Galloping costs, sold-out hydraulic fracturing equipment and shifts, as well as supply chain delays and bottlenecks are also reasons for slowing U.S. shale production growth this year despite oil hitting $100 a barrel.
The latest Dallas Fed energy survey showed the activity index for energy companies operating in Texas, northern Louisiana and southern New Mexico jumped in the second quarter to hit its highest level in six years, but costs continued to rise, and supply chain delays have worsened.
Shale companies note that there is intense inflationary pressure on costs amid supply chain bottlenecks, high inflation and rising wages in a tight market for skilled workers.
“These returns are fantastic”
Still, some companies say that in terms of performance, high oil prices have more than offset inflation.
“While we believe the industry is experiencing overall inflation of between 15% and 20%, our drilling and completions costs for the full year are only expected to increase by approximately 8.5% year-over-year. ‘other,” said Greg Hill, chief operating officer of Hess Corporation. of the company earnings call Last week.
“If you look at our portfolio, we have 2,100 or more drill locations that are generating great returns at a WTI of $60. So obviously at current prices, those returns are fantastic, right? And so certainly the movement in the price of oil from a yield perspective outweighs any inflationary effect,” Hill added.
Hess Corp’s major shale operations in the Bakken are generating strong cash flow these days, the executive said. At $60 worth of oil, the Bakken generates more than $1 billion in free cash flow for Hess, Hill said, noting that with current oil prices much higher, the company’s position in the North Dakota “is getting this huge cash annuity for the wallet.”
This week, Devon Energy and Diamondback Energy both reported strong second-quarter results and increased shareholder returns on Monday. Devon Energy raised its fixed plus variable dividend to $1.55 per share, up 22% from the prior quarter, and raised its full year 2022 production guidance by 3% to a range of 600,000 to 610,000 boe per due to “better-than-expected year-to-date well performance and the impact of an add-on acquisition in the Williston Basin.” The company raised its upstream capital guidance to a range of $2.2 billion to $2.4 billion for 2022 from $2.1 billion, and expects its capital to be fully funded. by operating cash flow, which is expected to reach nearly $9 billion at the current strip price.
Diamondback, for his part, generated a record $1.3 billion in free cash flow for the second quarter, beating the previous FCF record last quarter by 35%. The board of directors approved a $2 billion increase in Diamondback’s stock repurchase authorization to $4.0 billion.
“Starting this quarter, we are committed to returning at least 75% of our free cash flow to shareholders,” said Chairman and CEO Travis Stice.
U.S. shale companies are finally reaping the benefits of triple-digit oil prices as they continue to prioritize shareholder returns and debt reduction to take on more debt to post production records.
By Tsvetana Paraskova for Oilprice.com