US producers look to share the wealth

US oil and gas producers plan to spend rising cash flow more prudently in the coming year than in the recent past, hoping that a disciplined approach will increase their appeal among investors.

The US onshore oil sector has a long history of outspending cash flow to chase production growth. But many companies are now seeking to differentiate themselves by committing to stronger balance sheets and higher shareholder dividends. This strategy has become attractive as company share price gains have lagged the wider industry, despite higher oil prices.

The world's largest upstream independent, ConocoPhillips, is a prominent example. The company trimmed debt by $7.6bn to $19.7bnlast year through $16bn worth of asset sales, and returned 61pc of operating cash flow to shareholders. It aims to pare debt to $15bn by the end of this year. ConocoPhillips is overhauling its portfolio to a point where it can keep production flat with capital expenditure (capex) of just $3.5bn/yr, even if prices drop below $40/bl, chief executive Ryan Lance says. "We want to be the energy investment that competes against broad market performance."

The pressure on independents to shore up balance sheets and improve returns appears to have worked so far. But spending may remain constrained, despite benchmark Nymex WTI prices recently surpassing $70/bl. ConocoPhillips rules out raising its spending to lift output. "We have locked our scope," Lance says — a position shared by rivals such as Hess, Apache, Occidental Petroleum and Continental Resources. But a return to higher investment is not impossible. "We will see how the other [exploration and production firms] operate… if prices continue to rise and if the discipline persists."

US independents including Anadarko Petroleum, Hess and QEP Resources have launched share buy-back programmes, aided by multi-billion dollar divestments. Others, like Occidental, plan to resume share repurchases on the expectation of a sustained increase in oil prices. "We wanted to get a line of sight to see whether prices were going to remain this healthy," Occidental chief executive Vicki Hollub says. "Share buy-backs are part of our cash flow priorities, even though we pay a strong dividend."

Occidental — which repurchased $9bn worth of shares from 2005-15 before suspending the scheme — has not outlined how much stock it plans to buy back from investors. "It really depends on market conditions, pricing and other opportunities," Hollub says.

Return to spender

The main use of extra cash flow will be debt reduction for some companies, including Continental, which operates primarily in North Dakota's Bakken formation. The firm expects to generate free cash flow of $1bn this year at present crude prices, above previous guidance of $800mn-$900mn. It aims to use some of the extra cash to cut debt to $5bn in 2019, down from $6.2bn as of March.

Whiting Petroleum, another key producer in the Bakken, will examine share buy-backs if it successfully offloads its Redtail assets in Colorado in the second half of this year. The company would earmark part of the proceeds from the sale to pare debt, chief executive Bradley Holly says. And EOG Resources will use additional cash flow to raise its dividend and trim debt by $3bn by 2021 — its arrears stood at $6.4bn at the end of last year.

Apache, which is developing the Alpine High region of the Permian basin, is waiting for "better visibility", before it considers any shareholder returns, chief executive John Christmann says. The firm is expanding pipeline capacity and other infrastructure in the area.