U.S. shale oil companies are enjoying a cash bonanza as soaring oil prices and months of capital restraints transform the fortunes and balance sheets of a sector once known for its debt-fueled drilling spree .
According to research firm Rystad Energy, operators will reap about $180 billion in free cash flow — operating profit minus capital and maintenance expenditures — this year at current crude prices. That compares to huge losses racked up over a decade of rapid supply growth that came to a halt just before the pandemic.
And the amount of cash generated by traders this year will be more than the total earned over the past 20 years, according to S&P Global Commodity Insights.
“It’s a tsunami of cash,” said Raoul LeBlanc, head of S&P’s North American oil and gas division. “Companies are almost done repairing the balance sheet.”
Soaring shale profits have led to a rally in operator stock prices, with shares of U.S. oil and gas producers defying a selloff in the market this year.
It comes as Russia’s invasion of Ukraine has driven up oil and gas prices, prompting the White House to call on shale operators to drill more wells.
The number of rigs in operation has increased in recent months, mainly thanks to private companies, but oil production of 11.8 million barrels per day remains well below the peak of 13 million bpd seen before. the pandemic.
Shale executives insist they will stick to plans to control capital spending — and drilling —, instead spending their windfall on dividends, debt repayments and share buybacks.
“What is different today from the past? . . is that we allocate capital in a way that maximizes shareholder returns, rather than maximizing [production] growth,” said Nick Dell’Osso, chief executive of Chesapeake Energy, which filed for Chapter 11 protection in mid-2020 under the weight of debt accumulated over years of frantic drilling.
Chesapeake, once the poster child of industry excesses, emerged from bankruptcy in February 2021 – and earlier this month reported record quarterly adjusted free cash flow of $532 million from in the first three months of 2022.
It now expects to pay out $7 billion in dividends over the next five years, equivalent to more than half of its market capitalization on Friday.
“The industry was built on [oil and gas production] growth expectations and company stocks were assessed against growth expectations. It all had to be broken down,” Dell’Osso told the Financial Times.
The “reset” was painful, but management teams would stick to the new model, Dell’Osso said.
Cost inflation resulting from supply chain and labor constraints also deters companies from continuing to drill.
“There are a lot of headwinds to increased production around the world,” Occidental Petroleum chief executive Vicki Hollub told analysts last week. “We can’t destroy value and it’s almost value destruction if you try to speed anything up now.”
Occidental, which took on tens of billions in debt to buy rival producer Anadarko in 2019 – just months before the pandemic crashed – also staged a stunning comeback. It is using the financial windfall to reduce its leverage and said it could resume share buybacks in the second quarter. Its shares have risen 150% over the past year.
Analysts say publicly traded shale producers are now making so much money – and stock valuations remain so depressed after years of investor flight – that share buybacks could eventually make some private.
That equates to a “pretty phenomenal result,” said Matt Portillo, head of research at investment bank Tudor, Pickering, Holt & Co.
“If investors don’t return to the space, companies will slowly but surely privatize the entire share capital.”