Cash flow creates opportunities and challenges for oil executives
Many oil and natural gas executives over the past quarter have found themselves in the happy position of having to decide what to do with the unexpected extra money their companies have generated.
It’s a scenario that was generally unseen in the oil patch over the past four years.
While dealing with unexpected profits is a much more enviable position than dealing with lower-thanexpected earnings, it still poses challenges.
In some cases, Wall Street is making the decision for executives. After fleeing the oil and natural gas sector in
recent years, investors are placing high demands on companies before reinvesting in their stock.
To meet these demands, oil companies increasingly are using cash flow to return money to shareholders. In recent months, Devon Energy Corp. has agreed
to buy back $4 billion in common stock, repay $1 billion in debt and boost the dividend payment.
Chesapeake Energy Corp. executives last month announced plans to sell the company’s Ohio assets for up to $2 billion and use the proceeds to pay down at least $1.9 billion in debt.
The oil and natural gas industry historically has operated by spending all — or often well more than all — of free cash flow on drilling operations. Today, however, companies are focused much more on reducing costs and increasing efficiencies.
As a result of that new focus, suddenly increasing drilling can be difficult, especially in areas like the Permian Basin in west Texas and southeast New Mexico, where total production throughout the play has overwhelmed pipeline capacity and in many cases oil-field services capacity.
Devon CEO Dave Hager in June explained that the company has locked in contracts with services companies for the sand, water, crews and other needs through the rest of the year.
“We feel discipline around capital allocation is important,” Hager said. “If we would change our capital investment in the short term, we would risk degrading the returns because we would not optimize the use of those cash proceeds.”
Best-case scenario
But where most companies have used excess cash flow to reduce debt or return money to shareholders, Continental Resources Inc. executives this week announced plans to increase the company’s drilling budget by $200 million through the end of the year.
Continental Resources executives also have announced plans to pay down debt and said this week they are considering adding a dividend. But the company is one of few producers using money to increase drilling operations.
“It’s a great position to be in,” CEO Harold Hamm said Wednesday on a conference call with analysts.
“We have the opportunity for continued debt reduction, and we have the opportunity to put more money back into the growth and into the assets we’re developing. I think there will be a balance there.”
The increase is funded by $125 million in new cash flow and $75 million reallocated from other operations.
One-third of the additional drilling money will be used in North Dakota to increase the number of hydraulic fracturing stages per well to 60 from 40. The other two-thirds is earmarked for speeding up the company’s planned drilling program in Oklahoma, adding using two new rigs to drill an additional 14 wells by the end of the year.