America’s oil and natural gas producers are in defensive mode after a bruising earnings season during which executives pledged renewed austerity, with some going so far as to predict the end of the shale boom.
Promises may not be enough for investors already sceptical of management teams with poor track records for shareholder returns. Missteps by Occidental Petroleum Corp, Diamondback Energy Inc and Chesapeake Energy Corp sent their stocks tumbling.
The S&P Oil & Gas Exploration and Production Select Industry Index now trades close to a 15-year low and is down 16% this year.
Most US shale producers finally appear prepared to cast off old habits and reduce spending. Companies that outspent or increased budgets have been severely punished in equity markets this year and executives are keen to show that things will change in 2020.
But investors aren’t buying it yet and are waiting for concrete signs of progress. Occidental Petroleum Corp was even punished for cutting spending too much, as analysts questioned whether its absorption of Anadarko Petroleum Corp would produce enough oil to ease its giant debt load.
Some independent producers are telling investors they’ll grow output at slower rates next year. Diamondback Energy Inc chief executive officer Travis Stice said the “downward trajectory” in drilling will continue because of “frozen capital markets, tighter lending conditions, and the search for free cash flow sector wide.” Diamondback now forecasts its oil production will grow 10% to 15% next year – down from a 2019 target of about 27%. Consultancy IHS Markit, meanwhile, predicts that US production growth will flatten as early as 2021. “This is a dramatic shift after several years where annual growth of more than 1mn barrels per day was the norm,“ said Raoul LeBlanc, a vice president for North American unconventionals at IHS Markit.
American oil production has more than doubled in the past decade but it’s come at a cost – almost $200bn of negative cash flow. That may be starting to change. Independent explorers generated $742mn more than they spent this quarter, one of only four quarters since 2010 with positive free cash flow, according to data compiled by Bloomberg. However, almost all of that boost came from three companies: ConocoPhillips, Occidental and EOG Resources Inc.
The shale patch slowdown has ushered in “going-concern” doubts from a couple companies that built multibillion dollar empires from the fracking boom.
The biggest warning came from Chesapeake Energy Corp, which was once the second-biggest US producer of natural gas with a $37.5bn market capitalisation. Recently, the Oklahoma-based company told investors it may not be able to outlast low fuel prices. It’s stock has lost more than half its value in the meantime and is trading for less than $1.
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