The CEOs of two large independent producers said they know the "winning formula" to bringing investors back to the oil and gas patch: disciplined budgets that can generate free cash flow at low energy prices that can be returned to shareholders. The question they have is whether other producers will leave the wildcatter mentality behind the next time oil prices rise.
"Our dilemma is, as a sector we have destroyed a lot of trust in the investment community unfortunately over the last decade," Marathon Oil Corp. President and CEO Lee Tillman said during a panel discussion at CERAWeek by IHS Markit. "There is now a very clear expectation that we ... make returns for our shareholders."
As unconventional exploration and production has changed, so have investor demands. Shareholders are not as interested in land acquisition and production growth; instead they want to see their a bigger return on their investment. And until independents do so consistently, investors are likely to remain wary of putting their money into the sector.
Marathon has pulled out of 10 different countries as it shifted its primary focus to domestic shale plays given the lower costs and easier pathway to free cash flow. "It's a very attractive short-term investment," he said on March 12. "Those companies that can have capital budgets that drive sustainable free cash flow at very conservative pricing and are willing to share that back with shareholders, that's going to be the winning formula."
Tillman said the battering producers received from investors who did not stick to vows of fiscal discipline and shareholder returns last year was a wake-up call that nearly everyone received. "[Investors] want to see us generate free cash flow yields that are competitive with the S&P 500," he said. "If you liked 2018, you'll love 2019 and 2020, because it'll be more of the same."
Encana Corp. Chairman and CEO Doug Suttles said the lower cost nature of shale drilling has made it easier for the oil and gas industry to innovate and avoid big risks. Encana gets every drop of the nearly 600,000 barrels of oil equivalent it produces daily from horizontal wells with multiple hydraulic fractures.
"The experiments are cheap, and if they work you can repeat them thousands of times," he said. "I spent most of my career in deepwater, and if someone came in and said, 'We're going to try something new,' I'd say, 'No, you're not.'"
Suttles criticized companies that increased their capital budgets in early 2018 in response to higher oil prices, which he said frustrated investors looking fiscal discipline. The past year proved that unconventional producers can increase production at lower costs and restart dividends, pay down debt or buy back stock. Shareholders will expect it to continue.
"The question is, what will North American independents do with free cash? We can easily increase production by 1.5, 2 million barrels per day if we put every dollar back in [to production]," he said. "We have to discipline ourselves."