Sustainability Or Growth? E&Ps Face A Difficult Decision

Authored by Oil & Gas 360 via OilPrice.com,

Only 16 E&Ps are expected to grow production and keep spending within cash flow

U.S. unconventional E&Ps often find themselves in a difficult position in the current environment. The environment has long been “grow or die,” with high emphasis placed on companies growing production. Firms that have little growth prospects generally trade at significantly lower multiples.

On the other hand, a different group of investors have much different priorities.

Many investors have begun to place a premium on operational sustainability instead of growth. These investors prefer that companies are able to sustain operations and generate free cash flow, rather than spend beyond their means to keep growing.

Companies, then, are often forced to decide. Is it worthwhile to spend beyond cash flow to grow? The ideal company is able to do both, but most must choose one or the other. A tough downturn and volatile commodities prices have made E&Ps and investors cautious.

Out of 119 E&P companies, 72 are predicted to have average 2017 production exceed Q4 2016 production. Significantly fewer, only 27, are expected to have positive free cash flow in 2017. These two are not mutually exclusive, as a total of 16 companies have both positive free cash flow and production growth.

These 119 companies are plotted below.

How to read the graphs

Free cash flow is presented relative to market cap, to ensure operations are comparable and adjust for company size. Production growth, as previously mentioned, compares expected overall 2017 production with Q4 2016 production levels. Because debt is also a major means for companies to fund operations, each company’s debt to market cap is illustrated as bubble size, with higher debt giving a larger bubble. Companies are identified by ticker on each chart.

Several outliers are not included in the charts, to preserve scale. Micro Cap Blackbird Energy (ticker: BBI) predicts production growth of 2204 percent in 2017, and has zero debt. It will accomplish this with high spending, as its negative free cash flow balance represents 26 percent of its market cap. Rex Energy (ticker; REXX) also is not plotted, as its negative free cash flow balance is 330 percent of its market cap. Micro cap TransGlobe Energy (ticker: TGA), which predicts 505 percent production growth, and mid-cap Paramount Resources (ticker: POU), which expects 282 percent production growth, are also not plotted.

Large cap companies, defined as those with market capitalization above $10 billion, are all relatively similar. Most expect modest production gains of less than 20 percent, with only Canadian Natural Resources (ticker: CNQ) expecting larger gains.

(Click to enlarge)

Source: EnerCom Analytics

Mid-cap companies, those with market capitalizations between $10 billion and $1.75 billion, are less likely to spend within cash flow. Only five companies will generate positive free cash flow this year. On the other hand, almost every company will see production grow, with some growing by more than 50 percent in one year.

(Click to enlarge)

Source: EnerCom Analytics

Small cap companies, with market capitalizations between $1.75 billion and $350 million, are more variable. Nine out of twenty-nine will spend within cash flow, and nine will not increase production in 2017.

(Click to enlarge)

Source: EnerCom Analytics

Micro cap companies, with market capitalizations below $350 million, generally do not spend within cash flow, instead prioritizing growth. Only one company, Pine Cliff Energy (ticker: PNE) is predicted to have positive free cash flow in 2017. On the other hand, almost all small cap companies are expected to grow production.

(Click to enlarge)

Source: EnerCom Analytics

16 companies will do both:

- Canadian Natural Resources (ticker: CNQ)
- Continental Resources (ticker: CLR)
- Cabot Oil & Gas (ticker: COG)
- Devon Energy (ticker: DVN)
- EOG Resources (ticker: EOG)
- Granite Oil (ticker: GXO)
- Pine Cliff Energy (ticker: PNE)
- Whitecap Resources (ticker: WCP)
- Crescent Point Energy (ticker: CPG)
- Vermilion Energy (ticker: VET)
- Enerplus Corp (ticker: ERF)
- Spartan Energy (ticker: SPE)
- TORC Oil and Gas Ltd (ticker: TOG)
- Bonavista Energy (ticker: BNP)
- Bonterra Energy (ticker: BNE)
- W&T Offshore (ticker: WTI)

Rig Count Drops For 3rd Time In 6 Weeks As US Shale Heavyweights Boost Production

The pace of US oil rig count growth has slowed dramatically in the last six weeks as the lagged response to oil prices indicated. While US oil production continues to trend higher, in lagged response to the rise in rigs, it is also nearing its apex. However, four U.S. shale companies recently reported second-quarter production that beat targets and increased their respective full-year output growth guidance.

This is the 3rd weekly drop in the US oil rig count in the last six weeks...

Crude Production (in the Lower 48) topped 9mm last week for the first time since July 2015, and this week it rose once again to a new cycle high...but judging by the slowdown in rig count growth, production may be set to slow.

However, despite the slowdown in US oil rig count growth, OilPrice.com"s Tsvetana Paraskova notes that US shale heavyweights are set to boost production this year.

In a sign that the U.S. shale patch is boosting output that has been keeping a lid on oil prices, four U.S. shale companies reported second-quarter production that beat targets and increased their respective full-year output growth guidance.

EOG Resources reported on Tuesday Q2 total crude oil volumes rising 25 percent to 334,700 barrels of oil per day, setting a company oil production record. The company raised its full-year 2017 U.S. crude oil growth target to 20 percent from 18 percent and total company production growth target to seven percent from five percent, keeping capital spending plans intact.

“EOG can continue to grow at strong rates within cash flow,” Chairman and CEO Bill Thomas said.

Devon Energy beat its midpoint guidance with Q2 net production averaging 536,000 oil-equivalent barrels per day, and said that it was on track to achieve its full-year 2017 production targets. The company cut full-year capital outlook by US$100 million, citing “strong capital efficiencies” and saying it is keeping planned drilling activity for the year.

Diamondback Energy reported Q2 2017 production 25 percent higher than in Q1 2017, and raised full-year production guidance by 5 percent.

Newfield Exploration Company also beat its production targets and increased the mid-point of its full-year 2017 domestic production outlook.

Newfield Exploration now estimates that its year-over-year domestic production growth, adjusted for prior-year asset sales, will be around 8 percent.

“In the best parts of the basins, shale is here to stay,” Rob Thummel, managing director at Leawood, Kansas-based Tortoise Capital Advisors LLC, told Bloomberg, commenting on the shale drillers’ Q2 updates and guidance.

U.S. drillers expect to continue raising production this year, but some are adjusting spending to the expected cash flows in the current oil price environment, after prices failed to rise as much as analysts and investors had expected a few months ago.

“$50 a barrel is still a pretty critical number and that number is going to be even more critical as we move into next year,” Tortoise Capital Advisors’ Thummel told Bloomberg, noting that the lower oil prices could mean that companies would not hedge production as much as they would at higher prices to protect future output.

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Furthermore, OPEC compliance with production cuts agreed last year fell to 86 percent in July, according to a Bloomberg survey published on Aug. 1. That’s the second consecutive monthly drop -- now at the lowest since January -- and is down from 105 percent in April and May.

OPEC output rose by 210,000 barrels to 32.87 million barrels a day in July, driven by Libya, which added 180,000 barrels a day.

New US Shale Play Emerges As Rig Count Rises For 21st Week In A Row

Crude production from the Lower 48 dropped marginally last week, despite rising rig counts...

And in the last week oil rig counts rose once again (21st week in a row) up 8 to 741 - highest since April 2015 - notably given the lagged response to prices, we might expect the rig count rises to slow here.

But, while the Permian has dominated the conversation in recent months, OilPrice.com"s Irinia Slav explains the next big US shale play...

Media coverage of the U.S. shale oil and gas industry makes it sound like the Permian is the only place where things are happening. Everybody is buying acreage in the Permian, selling acreage in other shale plays, and production costs are falling the fastest in that same Permian.

True as this may be, this shale play is by no means the only one where production is growing. In fact, oil and gas output across the shale patch has been growing, as the Energy Information Administration’s latest drilling productivity report shows. And that’s not all because there is a new actor on stage: Powder River Basin in Wyoming.

Now, in its May drilling productivity report the EIA confirmed what media have been saying: the Permian is the hottest spot in the shale patch, with a 71,000-bpd increase in output in April. This hottest spot was followed by the Eagle Ford, which some see as a declining play but if we are to believe EIA data, it is far from a decline: drillers there added 36,000 bpd to total output in April.

Bakken, which the EIA last year said will become the largest source of tight oil and gas in the U.S., added 6,000 bpd to daily production, with Niobrara added 7,000 bpd. Even the Marcellus and Utica plays, which are more famous for their gas, are yielding more crude, with both adding 1,000 bpd to overall output in April.

All in all, despite much skepticism and open doubts in the actual performance of U.S. shale, the fact is that shale drillers are indeed boosting production. There is a school of thought that says the shale bubble will burst at some point, when producers stop being able to service the debts they are taking out to increase production but let’s bear in mind that they are not just investing in more production. Shale drillers are also investing in efficiency improvements that lower their production costs.

Now for the new player in the field, which is in fact not new at all. Bloomberg’s Alex Nussbaum calls Wyoming’s (and Montana’s) Powder River Basin “a home to cattle ranches and coal mines.” Yet until the 2014 price crash, the PRB was one of the shale oil basins that were growing at the fastest rate. Then prices tanked and drillers started getting out.

Now drillers are returning to the PBR. Crude oil production in the basin jumped to 1,000 bpd of oil equivalent over the last 12 months from less than 800 barrels and a major drilling expansion is on the way.

EOG, Chesapeake, and Devon Energy are planning to spend a combined US$600 million in that part of Wyoming, and pipeline operators are eager to expand in that direction. The reason: land prices are much lower than those in the Permian, for the moment. It’s all about early birds catching worms, and the earlier a bird is the better because prices in Powder River are already rising. A year ago, Nussbaum says, drilling permits went for less than US$1,000 per acre. Now, an acre costs US$17,000.

It may be that the Powder River Basin will repeat the success of the Permian, not least because its geology is similar, which of course means low production prices. Just this week, a local midstream operator, Evolution Midstream, purchased a gas gathering system from peer Lucid Energy Group, saying the asset will make the foundation for regional expansion now that interest in the Powder River Basin is growing so fast.