“Each man kills the thing he loves,” wrote Oscar Wilde. US oil executives know exactly what he meant. In 2014, the US shale industry helped tip itself into a downturn when booming production created a glut on world markets. Now investors are urging it to avoid making the same mistake a second time. Capital discipline and shareholder returns should be the watchwords for the exploration and production industry, management teams have been told, and many of them have responded. Since the shale oil industry was born at the end of the 2000s, it has been characterized by a debt-fuelled pursuit of growth at any price.
But helped by the rise in oil prices since last year, many US exploration and production companies are on course to make enough cash from operations to cover their capital spending. “Broadly speaking, the industry is moving from a growth-focused model to a returns-focused model,” says Osmar Abib, global co-head of oil and gas at Credit Suisse. “Cost structures are down and commodity prices are up. In this environment, a lot of companies are going to have positive free cash flow.” The stable market and attractive returns that investors are seeking, however, may be more elusive.
The message from equity investors to the industry has been unambiguous. “Don’t just drill, drill, drill,” says Kevin Holt of Invesco, the fund management group. “You have got to have a value proposition.” Mark Papa, one of the shale oil pioneers at EOG Resources, now chief executive at Centennial Resource Development, says chief executives of US E&P companies could always expect a warning from institutional investors about not destroying capital. Now that admonition is being delivered “with a vengeance”, he told the CERAWeek conference in Houston last month.