Shale Goal in Sight: Pump With a Profit, Without Hurting Growth

Updated on
  • Three charts show free cash flow, output, price intersecting
  • Third-quarter results suggest an industry on cusp of change
Shale Revolution: The Big Oil Test

Shale drillers are promising to add a new wrinkle to their world-shaking oil boom: they may finally make money.

In third-quarter earnings reports, explorers including Pioneer Natural Resources Co., EOG Resources Inc. and Anadarko Petroleum Corp. said they’re on the cusp of shrinking or even eliminating the gap between operating expenses and the cash they take in. That would mark a turning point for an industry that’s piled up losses and lived on borrowed money for years, as drillers plowed resources into developing new oil plays across the U.S.

The International Energy Agency acknowledged the U.S. boom’s resilience on Tuesday, predicting shale will be dominant in global markets for at least the next decade. If earnings forecasts are right, that dominance will come with a helping of fiscal discipline. Companies promised to heed investor calls for a hardened focus on dividends, buybacks and boosting stock prices.

To hear shale executives talk this earnings season “was to hear actors auditioning for the same part, reading the same lines from the same script," said Dan McSpirit, a BMO Capital Markets Corp. analyst, in a note to clients Tuesday. “The story was about capital discipline or growth within cash flow or some variation of it."

Here are three charts supporting that push:

Free Cash Flow

Among the biggest shale-focused producers, free cash flow -- the money left after subtracting operating costs -- are expected to rise in the coming quarters, according to analyst estimates tracked by Bloomberg. Some companies said they’ll even make enough to cover growing dividends.

The new “balanced operating model is in contrast to the industry’s historical behavior of aggressively chasing top line growth at the ultimate expense of shareholders," Dave Hager, chief executive officer at Oklahoma City-based Devon Energy Corp., told analysts on a Nov. 1 earnings call. “This is not a populist philosophy that we are paying lip service to. We are absolutely committed to doing business differently."

Oil Prices

It helps that producers have the wind of an oil rally at their backs. Brent crude prices rose 11 percent above the same period in 2016, settling in above $52 a barrel. Company revenues jumped and explorers across the board beat analyst expectations for sales and profits.

Production

U.S. government data released on Wednesday shows U.S. crude inventories increased for a second week, while nationwide output jumped for four straight weeks to a fresh record-high.

Despite a more cautious outlook on spending, and the effects of a destructive hurricane season, drillers also said they plan to pump more oil and natural gas in the fourth quarter and beyond. That could undercut an OPEC-led effort to cut global crude supplies that finally gained some traction in the third quarter.

Still, Tim Dove, the CEO at Pioneer -- one of the quintessential shale growth companies -- felt the need to reassure investors that profitability will remain paramount. “This is not just growth for growth’s sake,” Dove said on an analyst call, in reference to a 10 percent, quarter-on-quarter jump in Pioneer’s oil output. “These growth numbers are really based on strong returns and high capital efficiency.”

Whether the industry can stick to the value-over-volumes mantra remains to be seen, said BMO’s McSpirit. “We’ll call it a work of fiction for now, pointing to the industry’s past that doesn’t provide much evidence to support a change in behavior," he wrote.

— With assistance by Joe Carroll

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