Oil & Gas: Disrupted By Technology, But Many Investors And Companies Still Don't 'Get It'.
The article was submitted by Michael Fitzsimmons, perhaps one of the best contributors over at SeekingAlpha.
- I have been writing on Seeking Alpha about the technological disruption (i.e. fracking and Hz drilling) of the oil & gas industry for a few years now.
- That technology disruption has led to a new era of energy abundance in which the world has a huge and secure supply of oil and gas.
- Yet, from the comments to my articles, I can tell that many investors, in addition to many US O&G company CEOs, still don't "get it".
- As a result, the O&G sector has been one of the worst - if not THE worst - performing sectors of the entire market over the past 3, 5, and 10 years.
- Investors (and O&G CEOs) need to be careful to make sure that the next decade is not as bad as the last decade.
Near the end:
So, my advice to energy investors who - from many of the comments I see - are very bullish on their energy holdings is to, well, be careful.
As I have been mentioning in my comments and in this article, the only reason WTI is over $60/bbl is because OPEC+ is holding 6-7 million bpd off the global market.
If not for that action, WTI would likely be $10/bbl (or less).
In addition, don't underestimate the resiliency of US shale producers. Yes, they seem to have new-found religion when it comes to disciplined capital expenditures. However, the top shale producers are printing money at >$60/bbl WTI.
Note that COP, OXY, and EOG all made more than $1 billion of FCF in Q1. PXD delivered $369 million of Q1 FCF and notes that it just raised $750 million in relatively low-cost (as in 0.55%) short-term (2023) debt. Looks to me like PXD is going to be ramping up production. Will the rest of the shale companies stand idly by and watch PXD make hay while the sun is shinning? Will OXY, which badly needs to pay down its massive debt load, be a spectator or jump-in and pump?
My bet is that shale oil production will surprise the upside later this year. But I think we have a couple 3-4 months of clear sailing yet. Lastly, the oil & gas producers face ESG and EV headwinds that are not going away, just the opposite - they will be growing stronger every day going forward.
Take advantage of the current and substantial rebound in oil prices. The rest of this year looks good for a rally in oil producers given the economic re-opening, travel, and the stimulus plans.
But as soon as US exports start to threaten OPEC and Russian market share in Asia, watch out below because many of the 6-7 million bpd of production currently sitting on the sidelines are likely to be put on the global oil market. And that will be reflected (as we have seen in the past...) back on US shale oil producers.
On a completely different note but one of the reasons why I re-posted the above article again, this paragraph in the linked article above:
Unfortunately for me (and other COP shareholders), while COP's strategy has been brilliant, and their operational and financial performance excellent, the management team has fumbled the ball on the 1-yard line in my opinion. I say that because CEO Lance has made it clear that COP will be over-emphasizing share buybacks over dividends directly to shareholders.
As I have noted in my recent Seeking Alpha articles on Pioneer Resources - which has implemented a variable dividend policy, and EOG Resources which recently announced a $1/share special dividend, energy investors don't want companies that are focused on share buybacks and/or acquisitions simply to accumulate (yet more...) oil and gas resources, they want dividend income and companies that are going to deliver total returns to shareholders.
As a result, COP's stock has lagged that of the more dividend friendly management teams at PXD and EOG. That is because investors likely see no reason for management to build such a massive cash balance in light of last year's one penny dividend increase.