Source: Barrel Blog | Starr Spencer, Senior writer | February 5, 2018
As oil prices recover from the lows of 2014, US shale producers face a choice: continue to invest in record production or start returning cash to investors who helped them weather the downturn.
It used to be that investors rewarded US upstream operators that could quickly grow production. More crude output growth per quarter separated oil patch E&P champions from the rest of the pack. That paradigm came under pressure starting in 2014, when prices plunged and common wisdom said producers would curb output and ride out the storm.
But nimble US shale companies surprised everyone, finding ways to slash costs, drill more efficient wells, and pour cash back into drilling and production.
Onshore producers have added nearly 4 million b/d of production since 2011. Their innovations pushed US production over the 10 million b/d mark in November for the first time since 1970—earlier that the US Energy Information Administration had expected.
And even as their wells turned out higher outputs, their profits went back into drilling and production growth. Overall, they were not generating free cash flow for shareholders, who in recent months have sent a strong message to oil executives that they want to see more of it.
Free cash flow is cash a company generates after expenses required to maintain or expand an asset base. During much of 2015-2016, company executives talked about getting to “cash flow neutral” — a state where cash generated matched expenses. Now, the goal is to turn out excess cash and use it for purposes besides production growth.
While oil companies want to keep investors happy, they are still talking about production growth — or at least they were during the third quarter, Trisha Curtis, co-founder of energy analytics and advisory firm PetroNerds, said.
“From banks and the investor community, it sounds like the pressure has been more intense between the third quarter and what we’ll see in fourth-quarter calls,” Curtis said. “I still don’t think that means producers will forego production volumes [since] most talked about increasing output” in 2018.
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