Many public E&P companies have just under 10 years of inventory in the U.S., causing serious concern for investors, said David Deckelbaum, managing director of TD Cowen, on Oct. 3 at Hart Energy’s A&D Strategies and Opportunities conference .
“Investors are freaking out about inventory life right now and productivity per well trends. … We’re not growing so much anymore,” Deckelbaum told the crowd.
Also at the conference was Nick O’Grady, CEO of Northern Oil & Gas, who said his company constantly confronts the reality that shale inventory is maturing.
“If this is a game, we are in the third quarter here. We are not in the first half. That’s how I think about shale,” he said. “Investors are scared. … The follow-up act is quite challenging.”
Deckelbaum said inventory draws are coming down to historically low levels.
“I think there’s a lot of opposing views on where we’re going next,” Deckelbaum said, later adding that Permian Resources Corp.’s purchase of Earthstone Energy for $4.5 billion in August was at a 15% premium and came to be interpreted positively by investors when Permian’s stock outperformed the XOP.
“Investors were pretty happy with this deal, and I think it had a lot of folks in boardrooms thinking, ‘Maybe we can get away with paying a premium for things again,’” he said.
Investor satisfaction has been a top priority in recent years as E&Ps use hefty free cash flows for capital returns in investor programs consisting of robust stock buybacks and dividends that are higher than other S&P sectors.
Deckelbaum said most E&Ps are using up to 50% of their free cash flow for dividends and buy backs.
“They’re more comfortable buying their own share that are more expensive than most of the M&A acquisitions that are out there,” he said in a presentation that showed deal activity at the lowest levels since 2015.
Further complicating the picture is a private equity overhang in E&P ownership.
“I think the public investor has a hard time seeing the amount of ownership structures that private equity holds in publics and not being able to forecast the timing of when they might be liquidating,” Deckelbaum said.
At the Oct. 2 Energy Capital Conference and in interviews with Hart Energy, private equity leaders said they’re finding it more lucrative to hold on to assets longer than in the quick-to-flip days of the shale boom.
“Our companies that we are invested in are currently almost exclusively in full development mode. [It’s] a very different story than the public side because we’re not looking at distributions or stock buybacks—a complete recycling of cash flow,” said Frost Cochran, managing director and founding partner of Post Oak Energy Capital. “The drill bit is where we see the opportunity to gain some edge while some of the public companies are captive to their dividend and stock buyback strategy.”
Deckelbaum also spelled out some reasons for optimism, however, saying there are credible reasons to believe the U.S. could grow to produce a couple hundred thousand barrels a day.
“Most companies are making plenty of money. … I think they did succeed in lowering volatility around their stock prices by not overinvesting so much in capex,” he said. “But I think the next wave is, you’re going to see a lot of independent companies looking back at an older playbook of looking at more international assets, perhaps more conventional assets—things that really have resource exposure. … The Permian is just not moving the needle enough for them right now.”
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