Oil boom worries US investors

Forgive US energy investors for being wary of the oil boom, but this time they want their money in advance. US oil prices have soared back above $60 per barrel. Four years ago, the last time oil drilling exploded, the crash in prices led to a wave of bankruptcies for the independent producers that had gorged on highyield debt.

Another glut is now afoot. US daily oil production has jumped to 10-million barrels a day, a level last seen in 1970. The International Energy Agency recently said that by 2023 the US will be the largest energy producer in the world.

For American pride, this is all to the good. But for shareholders obsessed with returns on investment, the boom is cause for concern. In the most recent quarter, 15 US oil and gas companies announced greater dividend and buy-back policies. Perhaps most notably, Anadarko Petroleum raised its dividend by five times from 5c per share to 25c.

The new-found bounty has been enabled in large part by a burst of drilling productivity. There were about 1,400 onshore rigs three years ago — now that number has shrunk below 800. Efficiency comes from technology: big-data computing and more advanced rigs.

According to Credit Suisse calculations, the ratio of forecast cash flow to capital expenditure is now at 92% after years of investment spend that far exceeded cash flow. Capital markets have become less willing to fund those deficits, forcing companies to learn how to live within their means.

The crucial piece in this circular puzzle is, naturally, oil prices. Now above $60 a barrel, all sorts of oil companies are suddenly profitable and have enough self-generated resources to fund capex as well as healthy capital return. Still, shares of US independent drillers are down near a 10th for the year. The caution is understandable. Corporate discipline can be fleeting. Getting paid a little up front makes sense. London, March 12