Investor displeasure has forced oil and gas producers to permanently change their way of doing business, ConocoPhillips CEO Ryan Lance said May 23.
During a discussion at the AIPN International Petroleum Summit in Houston, Lance explained that the habit of producers to put free cash flow back into the company instead of returning it to shareholders had angered investors to the point where they are now largely ignoring the segment.
"What was important for us to recognize is that the industry has destroyed value over the past 15-20 years. That's why investors have fled this business," he said. "That's why … energy companies used to represent 10-12% of their portfolios three, five, 10 years ago; today it represents about 5%."
While the markets have not been kind to most publicly traded companies in the upstream segment, Conoco's shares have increased in value by $25 since February 2016. Lance said being one of the first companies to place a "hyper-focus" on returns to shareholders instead of aiming for internal growth helped put Conoco ahead of the curve.
"We stepped back and said, 'Hey, this isn't working.' You've got to have the shareholder up front, and you have to build the company with the cash flow that's left over," he said. "You've got to focus on return of capital. At the end of the day, that's what it's going to take to get investors to come back."
Lance said efficiencies developed over the past half-decade have allowed the company to put together a capital budget that breaks even with West Texas Intermediate crude oil prices in the low $40 per barrel range. The capital budget, he said, is assembled with what capital is left after shareholders are rewarded, which leads to "knife fighting" between different assets for capital.
"We can pay our dividend at $40 per barrel; we're sticking to our $6 billion capital program. We're getting more work done with that $6 billion than we did with a $10 billion capital budget … We're being smarter," he said.
When asked if he believed Occidental Petroleum Corp.'s $57 billion takeover of Anadarko Petroleum Corp. would start a wave of high-dollar M&A, Lance said a need for consolidation exists, pointing to approximately 110 companies currently operating in the Permian Basin. But high costs and investor discontent with companies who have made moves are making potential buyers wary. That has proven to be enough to keep Conoco, and other major players, on the sidelines.
"There's the big corporate-level M&A that require significant premiums. Those are difficult," he said. 'There's a lot of bid/ask issues in the market today. People ask if [the Occidental-Anadarko deal] is going to open the floodgates to consolidation, and I don't think that's going to happen."