Investors want clear guidance from upstream companies

[dan_s]

I expect PXD's guidance to be modest growth of 3% to 5%. EOG has already said they'd like to increase production by 8% to 10% this year.

By Kevin Crowley, David Wethe and Sheela Tobben
(Bloomberg) -- U.S. shale executives have finally achieved
something that eluded the industry for more than a decade: the
ability to turn over billions of dollars in dividends to
shareholders while at the same time boosting production to tap
into surging global oil demand.
The question now is just how much the shale explorers will
reinvest in fresh drilling. The stakes are high for them and the
entire global economy: Drill too much and they risk triggering a
damaging price war with OPEC and its allies; drill too little
and oil could soar to $100 a barrel and throttle growth across
the world.
The next few weeks will be telling. Executives at industry
heavyweights Pioneer Natural Resources Co. and EOG Resources
Inc. will be pressed to reveal details on their investment plans
when they report quarterly earnings. Investors cheered the
frugality adopted by management teams after the pandemic-driven
collapse in demand and prices, making oil stocks the best-
performing sector of 2021.
Now, with Pioneer's cash flow expected to be large enough
to fund dividends nine times its 2020 payout and EOG seen
reporting record-high annual income, both companies are prepared
to grow output up to 5%.
It’s a titanic shift from the first decade of the shale
boom. Back then, companies drilled at a frenetic pace, driving
U.S. output to record highs and provoking back-to-back price
wars with the Organization of Petroleum Exporting Countries. The
result: Shale companies posted a collective $200 billion in
losses, which prompted Wall Street to sour on the industry. So,
when the pandemic hit and prices collapsed further, companies
had no choice but to restrain drilling, dismantle rigs and fire
workers.
The U.S. oil industry now has a range of options for
balancing growth with shareholder returns. For example, oil at
the $79 mark allows oil producers to return $50 billion of cash
to investors and lift output by 2 million barrels a day,
according to IHS Markit. That’s equivalent to the entire annual
production of Nigeria and Venezuela combined. Or, they could
return $75 billion and grow daily output by just 500,000
barrels.
“Shale can and will bounce back at some price,’’ said Raoul
LeBlanc, vice president for upstream at IHS Markit Ltd. With
crude fetching more than $80, the industry “can give back very
large sums to shareholders and start growing again.’’
Bloomberg Intelligence expects its universe of publicly
traded oil companies this year to generate a record $67.1
billion of free cash flow, the pool of money left over for
dividends, buybacks and debt reduction, a 33% increase from
2021. International crude topped $90 this week for the first
since 2014 and the domestic benchmark isn’t far behind.
As alluring as high crude prices are to public drillers,
shareholders’ appetite for cash returns is paramount. Companies
boosting their payouts have helped lure investors back to the
sector, casting oil companies as the top performers in the S&P
500 Index this year and adding to outsized gains in 2021.
“Public companies won’t want to risk breaking away from
their current mantra of limiting output,” said Elisabeth Murphy
at ESAI Energy LLC. “It has paid off for them, so why change?”
“Shale can and will bounce back at some price.” -- IHS
Markit’s Raoul LeBlanc
Production in the world’s largest shale field, the Permian
Basin of West Texas and New Mexico, already is growing, having
hit a new record in December. Total U.S. output is expected to
reach 12.4 million barrels a day in 2023 -- 11% more than 2021 < U.S. oil production was 12,860,000 bpd in Nov 2019
and higher than Saudi Arabia’s current production. Most of that
growth is coming from closely held shale explorers who control
most of the American rig fleet and are seen boosting drilling
budgets by more than 40% this year, according to Evercore ISI.
“If the U.S. is adding less than a million barrels a day
you’re probably going to be in a nice sweet spot,'' said Chris
Duncan, an analyst at San Diego-based Brandes Investment
Partners, which manages about $25 billion. Any more than that
“and you’re going to have an issue with the world absorbing
that.''
“The chief executives of ConocoPhillips and Occidental
Petroleum Corp. both said Monday they expect U.S. crude output
to increase by about 800,000 barrels a day this year.
The urge to cash in on higher prices has been so strong
that it’s luring veteran oil managers out of retirement. Take
Matt Gallagher, for instance. He's a third-generation Texas
oilman who formerly ran Parsley Energy Inc. before selling it
for $7 billion 13 months ago.
“As things started opening back up, it was clear that there
was a need for new barrels, so we’ve been in sprint mode since
then,” said Gallagher, who now heads closely held Greenlake
Energy Ventures LLC. “We think the timing is really good and
we’ll be able to lock in healthy prices.”
Gallagher, who drilled his first well this month, is keen
to emphasize that he’s learned lessons from the industry’s past
failings. He’s locking in current high prices through hedging
and is taking a “surgical approach” to drilling.
Developing expansion plans at his new company is “much more
nimble” than at publicly traded Parsley. “Nimble is good and
it’s okay for us to stop.”