Higher oil prices, careful spending energize profits
Texas’ largest independent oil producers are generating big profits and pumping more oil again as crude rebounds, but unlike in past cycles of rising prices, the companies are moving ahead cautiously and avoiding the rapid expansions that burned cash, piled on debt, flooded the market with oil and eventually led to an industry crash, analysts said.
First-quarter earnings reported this week showed that companies are spending conservatively and controlling costs, which is bolstering their bottom lines. As a result, companies such as Anadarko Petroleum Corp. of The Woodlands and Marathon Oil Corp. of Houston reversed losses from last year and posted sizable gains in the first three months of 2018. EOG Resources, also of Houston, said Friday that its profit jumped to $639 million in the first quarter from $29 million during the same period a year ago.
Brian Youngberg, an energy analyst at Edward Jones, said oil executives are remembering the lessons of the last oil bust, which sent prices tumbling from more than $100 a barrel to less than $30 and led to billions of dollars in losses and thousands of job cuts. And, if they don’t remember, shareholders are reminding them, demanding higher profits in the forms of dividend payouts and share buyback programs.
“I think it has changed,” Youngberg said. “The downturn is turning out to be a blessing in a way, and it’s really instilling discipline.”
The U.S. benchmark oil prices is now sitting just below $70 a barrel — the highest since November 2014 — supported by the potential end to the Iran nuclear deal, which in part allows Iran to produce more oil, and the col-
lapse of production in Venezuela, which is mired in political and economic crises.
Companies are keeping spending in check but still pushing U.S. oil production to all-time highs, driven by West Texas’ booming Permian Basin. Companies are producing more oil from each well by drilling deeper and extracting more crude per foot from the shale rock. That has meant fewer rigs and workers, and ultimately lower costs.
“The efficiency gains we continue to see are just amazing,” Youngberg said. “The industry continues to innovate at an incredible pace.”
While the Permian will dominate U.S. production for the foreseeable future, other oil fields are coming back to life. Marathon Oil, for instance, said it is making money again in North Dakota’s Bakken Shale. EOG promoted the Eagle Ford Shale in South Texas as its premier play, even as it grows in the Permian.
A major reason activity is increasing in the Eagle Ford is a barrel of crude is worth more than $10 more than a barrel from the Permian on spot pricing markets, said Guy Baber, an energy analyst at Piper Jaffray & Co. in Houston. That’s because a lack of pipelines in West Texas makes it hard to move oil on schedule, which reduces the number of buyers.
Also, labor and housing shortages make it difficult to find good workers without paying large premiums to get them to move to West Texas.
“The Permian remains the hottest basin for good reason,” Baber said. “You have record low unemployment, and some truckers in West Texas are reportedly earning $300,000 a year. You’re seeing all-out activity.”
The only big Texas independent to see its net income fall was Houston’s Apache Corp. Apache said it earned $145 million in the first quarter compared with $213 million a year ago. But last year’s profit was inflated by Permian Basin land sales that generated $340 million.
In a call with analysts, EOG CEO Bill Thomas described the company’s first quarter as outstanding, checking off the boxes that Wall Street wanted checked: disciplined spending, increased dividends, debt reduction and improved profit per well. Thomas said that EOG would make money even if oil prices fall back to $50 a barrel.
But the one box left unchecked — a share buyback program to boost stock values — still managed to disappoint some investors. EOG’s stock fell $1.35 per share, or 1 percent, to close at $114.66. Still, EOG shares have climbed more than 25 percent in the past 12 months.
Occidental Petroleum Corp., another large Houston area independent, reports its first-quarter earnings next week.