Colorado oil and gas drillers focused on cash flow, not increasing production during energy crisis
For the second time in the past two weeks, a major Colorado oil producer has told shareholders it is unlikely to increase production amid Skyrocketing global energy pricesinstead promising to funnel much of the extra cash flow into investors’ pockets.
Speaking in an earnings call on Wednesday, Civitas Resources Chairman and CEO Ben Dell told investors that the company’s financial decision-making this year “will come down to a discussion of what is the best, in terms of the easiest way to return capital” to Wall Street.
“We have a high base dividend, we have outlined our structure and the calculation of the variable dividend – which, if commodity prices are obviously supported, will continue to grow,” Dell said. “I think after that the real question is, how do you feel about buyouts? What do you think of consolidation and filling (mergers and acquisitions)? And then, what do you think of a special dividend?
Repeatedly throughout the call, Dell and other Civitas executives assured investors that its capital expenditures and reinvestment rates would remain low, even if Oil prices exceed $100 a barrel for the first time in eight years.
“We are very comfortable with our capital program for the year which we have already described,” Dell said in response to a question about the increase in the number of rigs in operation. “I don’t think you’ll see our strategy shift significantly away from that.”
Civitas was created last year following a chain of mergers and acquisitions involving four of Colorado’s nine major oil producers: Extraction Oil and Gas, Crestone Peak Resources, Highpoint Operating and Bonanza Creek Energy. The new company has just added a fifth major acquisition, private operator Bison Oil and Gas, in a deal announced last month. Together, the five companies operate thousands of producing wells across the state – and have 358 other approved drilling licenses, according to data of the Colorado Oil and Gas Conservation Commission.
This stockpile represents just a small portion of the nearly 3,000 approved drilling licenses held by operators across Colorado, including about 1,900 in the oil-rich Denver-Julesburg Basin in the northeast quarter of the US. State. More than a thousand other wells have been reported to the COGCC by operators as either being drilled, or already drilled but awaiting “completion” – the final stages of preparing a well for production, including hydraulic fracturing or hydraulic fracturing.
But despite continued calls from Republicans at the state and national level for policymakers “to free” national oil production in response to the Russian invasion of UkraineCivitas’ recent financial statements further underscore the economic realities and investor demands that make a significant increase in drilling activity unlikely.
The dizzying consolidation that led to the formation of Civitas made the new company a headliner in the wave of bankruptcies, acquisitions and mergers that swept through the American drilling industry in recent years – before and after the start of the coronavirus pandemic.
Extraction, the largest of the companies that preceded Civitas, acquired a famous reputation among environmental activists in Colorado for his drilling projects pushed near residential areas along the Front Range throughout the 2010s. filed for Chapter 11 bankruptcy in June 2020 after years of worrying about his growing debts.
The huge capital outlays that Extraction and many other domestic drillers made during the “shale revolution” – With reference to shale oil reserves that could be exploited through technological advances such as hydraulic fracturing and horizontal drilling – have led to a dramatic boom in US oil production in the 2010s, which helped keep gasoline prices low. But Wall Street investors gradually soured on the industry in the second half of the decade as debts piled up and many shale drilling projects proved less profitable provided that.
As a result, Wall Street has put pressure on the industry exercise more “discipline” and prioritize shareholder returns over reinvestment in new drilling projects. Under its new corporate brand, Civitas promised investors that it would “exemplify the new business model (of exploration and production) for U.S. producers, emphasizing operational discipline, cash flow generation available cash (and) financial alignment with shareholders”.
In Colorado and beyond, industry trade groups and their GOP allies have used the global energy crisis to call for a variety of regulatory rollbacks and accelerated approval processes that they say would help spur the production. Colorado Representative Lauren Boebert, a Republican from Silt, urged the federal government to “immediately unleash our full energy potential” and attended the State of the Union address earlier this month wearing an emblazoned shawl with the words “Drill Baby Drill”.
“Years of short-sighted policymaking at the state and federal levels have contributed to who we are today,” said Lynn Granger, executive director of the Colorado chapter of the American Petroleum Institute, in a statement calling Thursday to additional COGCC permit approvals.
But in recent shareholder communications, Colorado’s biggest oil producers have consistently spoken much less about those regulatory concerns than about their financial fundamentals and commitments to limit production growth.
PDC Energy, Colorado’s third-largest oil producer, echoes Civitas’ message by emphasizing its “new capital repayment framework” during an investor call last week. After its recent acquisition of Great Western Petroleum, the company has more than 300 approved drilling permits, according to COGCC data; in one tax returnPDC said its inventory of approved permits and drilled but uncompleted wells “represents a lifespan of more than ten years at the current rate of development.”
Despite the dramatic and continued rise in oil prices – a trend that shows no sign of abating following President Joe Biden’s imposition of a ban on imports of Russian oil and gas – little or no Major US oil drillers have given concrete indications that they plan to boost production. Scott Sheffield, CEO of Texas shale driller Pioneer Natural Resources, made the headlines last month, when he said his company would not change its growth plans even if oil prices hit $200 a barrel, although he later said he would reconsider whether a “coordinated effortto increase production took shape among Western governments.
The CEO of Colorado’s largest oil producer, Occidental Petroleum, was among industry executives and analysts who downplayed the possibility of significant output growth at a conference this week. Oxy CEO Vicki Hollub told attendees at the annual CERAWeek energy summit in Houston that labor shortages and supply chain issues were among the contributing factors.
“If you didn’t plan for growth, you can’t achieve growth today,” said Hollub, according to Reuters. “Today, capital discipline for oil companies is essentially no growth (in production).”
This is especially true for the fast-growing, zero-spend drilling companies that once fueled the shale revolution’s production boom in states like Colorado, Texas and North Dakota. Dell, founder and managing partner of private equity firm Kimmeridge, which acquired bankrupt Extraction and brokered the mergers that formed Civitas, said Thursday that a more stable long-term outlook provides more certainty for investors.
“It’s clearly a highly cyclical and highly volatile industry,” Dell said. “The basic assumption is that we’re going to stick with our existing plan and you’re not going to see any material change in that area over the next 12 to 24 months.”
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