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US oil producers resisting siren song of spending despite price rise


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US oil producers resisting siren song of spending despite price rise

Stung by the recent oil and gas price collapse and feeling pressure from investors to stick to their budgets, formerly profligate U.S. drillers are doubling down on their new belief in fiscal discipline even as oil prices have sprinted to $70 per barrel.

Coming into 2018, most large independent producers had set capital plans with the assumption that oil prices would be in the range of $50/bbl for the year. Even though prices are now well past that range, one company after another used time during their earnings calls to reiterate that they had no plans to alter their models. With the scars of the multiyear price collapse that began in 2014 still fresh and investors routinely punishing companies that come close to overspending, executives are trying to soothe shareholders with promises of better returns and tighter budgets.

"Most of them are holding steady for now," Morningstar Inc. oil and gas analyst David Meats said. "I saw very few operators adding rigs beyond what was originally planned. Likewise, I didn't see many changing their price forecast, either."

At Anadarko Petroleum Corp., CEO Al Walker stressed a "strategy of delivering attractive, capital-efficient growth and applying certain of our free cash flow to fund the repurchase of stock, dividend increases and debt reduction." He said during his company's earnings call, "Our views as a company are no different than the comments we expressed in January related to this. … We felt like the best use of our cash was to buy back stock, increase dividends and to retire debt as we shrink the balance sheet."

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EOG Resources Inc. was one of the companies that set its budgetary bar fairly low, stating that it could fund its complete capital plan with $50/bbl oil and would have significant free cash flow at $60/bbl. In the past, producers may have seen such a cash influx as an opportunity to expand, but company CEO William Thomas took a stance similar to many of his colleagues when the prospect of M&A was brought up.

"Let me be clear on one point: We have no interest in extensive corporate M&A in any commodity price environment," Thomas said. "Having low debt strengthens the sustainability of our dividend and maintains our investment flexibility through the volatility of the commodity price cycle."

When asked whether independents will keep their promises and avoid CapEx increases as greater revenues roll in, Williams Capital Group LP upstream energy analyst Gabriele Sorbara predicted that most would. Increases in CapEx could be considered foolhardy, he said, with the effects of the price collapse still felt and transportation constraints looming in the nation's most productive play, the Permian Basin in West Texas. "Guys in the Bakken, Niobrara and Eagle Ford are still licking their wounds. [The price collapse] is too fresh in their minds," he said. "In the Permian, it's still too early, and these price discounts [to transport crude] and gas prices have been a disaster."

The Permian Basin has been the world's hottest play for more than a year, but booming oil and gas production has had some negative effects. The play is nearly out of pipeline capacity for both oil and gas as new production records are hit monthly. To get their product to market, companies are now taking significant markdowns. West Texas Intermediate barrels in Midland, Texas, are priced about $10 below the transport hub at Cushing, Okla. Things could get worse: November 2018 futures show a discount of nearly $15. Add in a likely rebound in oilfield services costs, and $70 is not what it used to be.

"We haven't heard much about signs of service cost inflation in the first quarter, but it's going to come," Sorbara said. A few companies in the Permian have tested the resolve of shareholders in recent days, only to have their share price regret it. During a May 9 earnings call in which the company said it would increase production guidance and decrease anticipated operating costs, Diamondback Energy Inc. also mentioned that it might add rigs later this year if prices stayed high. Shares dropped nearly 10% in the next two days.

"For the most part, they've remained pretty disciplined. They're aware of the macro environment: Oil prices are good, but NGLs are weak and gas is weak," Sorbara said. "Also, a lot of these companies have started giving money back to shareholders. If they were to ramp up again, only to have prices fall and they had to suspend their dividend, they'd be crucified."