Investors yet to gain from surging shale production

As US oil production tops 10 million barrels per day, approaching a record set in 1970, many investors in the companies driving the shale oil revolution are still waiting for their payday.

Shale producers have raised and spent billions of dollars to produce more oil and gas, ending decades of declining output and redrawing the global energy trade map. But most US shale producers have failed for years to turn a profit with the increased output, frustrating their financial backers.

Wall Street’s patience ran out late last year as investors called for producers to shift more cash to dividends and share buybacks.

“‘Give me some cash, please.’ That’s what investors have said,” said Anoop Poddar, a partner at private equity firm Energy Ventures.

And yet such calls for payouts remain a debate in the industry as oil prices have recently crept up to four-year highs.

Investors demanding immediate returns could risk forcing firms to curb expansion that could have a higher long-term payoff if oil prices continue to rise.

For now, share prices of shale producers have yet to fully recover from the 2014 oil price collapse, when many investors took losses as hundreds of firms went bankrupt and those that survived struggled.

The energy sector has lagged behind the rally that took the broader stock market to record highs. The S&P 500 Energy Index remains nearly a third off its peak in mid-2014, when oil prices topped $100 a barrel. The broader S&P 500 index is up 39 per cent during the same period.

A Reuters analysis of corporate dividend disclosures shows a split in how shale firms are reacting to increased pressure from investors – and the impact on their market value. This year, five of the 15 largest US independent shale firms have started paying or raised quarterly dividends, the documents show. But six of the firms have never offered a dividend or have not restored cuts implemented since the 2014 oil price collapse.

Anadarko Petroleum earlier this month added $500 million to an existing buyback programme and raised its dividend by 20 per cent, sending its shares up 4.5 per cent the next trading day. Buybacks reduce the number of shares outstanding, boosting the value of stock that remains. Shares in Pioneer Natural Resources also rose 4 per cent immediately after raising its dividend four-fold and posting better than forecast fourth-quarter results earlier this month. Tim Dove, Pioneer’s chief executive, called the increase “a step toward our goal of returning cash to shareholders”.

Companies that have resisted boosting dividends, by contrast, have seen their valuations fall.

Of the six, shares in four – Cimarex Energy, Devon Energy, Parsley Energy and Noble Energy – have lost at least 19 per cent in the past 12 months. Only one, Continental Resources, is higher than a year ago. Four producers, including Hess, kept dividends steady through the downturn.

Recent oil price gains have eased the pressure from shareholders.

In January, US oil futures jumped to $66.14 a barrel, up 56 per cent from last year’s low and at a level not seen in four years.

Since then, prices have cooled to about $63 a barrel, but remain 17 per cent above a year ago, boosting cash flow for firms that have expanded output.

“A lot of these smaller companies have got a pass for outspending cash flow due to their very high growth rates,” said Todd Heltman of the asset manager Neuberger Berman, which invests in shale producers.

Shale output growth continues to outpace forecasts. The US Energy Information Administration this month said US production could top 11m bpd by the end of 2018, a year earlier than it had expected just a month ago.

Mr Heltman has pressed shale firms to show restraint even amid rising prices. And despite higher revenues, spending increases have so far been restrained.

Investors are searching for firms that can find the optimal balance between the conflicting goals of controlling costs, paying dividends and increasing production.

Investors demanding immediate returns could risk forcing firms to curb expansion that could have a higher long-term payoff