Shale companies amassed huge cash in the second quarter as oil surpassed $ 70 a barrel, but many missed larger sums after hedging contracts squeezed profits.
Leading frackers such as Scott Sheffield of Pioneer Natural Resources Co.
PXD -1.30%
and Harold Hamm of Continental Resources Inc.
CLR -3.63%
were the opposite of the hedging strategy, with the first company so far missing an around $ 1.5 billion hike due to derivative contracts, while the second was almost unhedged and fully reaping the fruits of soaring crude prices.
As U.S. oil and gas producers struggled to survive last year’s historic collapse in oil prices at the start of the coronavirus pandemic, many have used hedges to lock in prices for their 2021 production. around $ 50 a barrel, essentially buying insurance against the possibility of having to drive another crash.
These contracts have ended up costing some companies hundreds of millions of dollars this year, at least on paper. In addition to Pioneer, Devon Energy Corp.
DVN -2.42%
and Diamondback Energy Inc.
CROC -2.09%
recorded a total of $ 1.9 billion in derivative losses for the first half of 2021.
Nonetheless, many of those same shale producers still posted strong second quarter results overall. Continental collected $ 289 million in net income on $ 1.2 billion in revenue, its best quarterly result since 2018. Pioneer’s profit reached $ 380 million, the highest in three years, at $ 3.4 billion dollars of income. Diamondback’s net profit of $ 311 million was its best since 2019, while Devon hit a two-year high of $ 256 million in profit.
Large producers ConocoPhillips COP -1.32%
and Occidental Petroleum Corp.
OXY -0.11%
saw its revenue more than double from the same period last year, to $ 10.2 billion and $ 6 billion, respectively. ConocoPhillips’ profit of $ 2.1 billion was the highest since mid-2019, while Occidental recorded a net loss of $ 97 million.
Many companies have been successful in raising enough cash to raise dividends which they believe will exceed average returns on the S&P 500.
The half-dozen of major U.S. oil producers who reported profits this week raised $ 7.2 billion in uncommitted cash in the second quarter, culminating the industry’s shift from excessive cash flow to withholding. money from the oilfield as prices skyrocketed.
Companies that took on debt over an unprofitable U.S. oil boom touted higher dividends in the quarter, with several announcing increases in payments. Pioneer and Devon, which deploy so-called variable dividends paid from free cash flow, have forecast their dividend yields this year to be 8% and 10% respectively. Quoting FactSet, Devon said its dividend yield would be seven times the S&P 500 average.
Shale producers have high dividend yields because their stock prices are always undervalued against rising commodity prices, Pioneer Chairman Richard Dealy said in an interview. It will likely take a few quarters of payments to larger shareholders for the shale industry to gain traction with investors in general, he said.
Pioneer shares rose about 8% on Tuesday after announcing it would move its first variable dividend payment by $ 370 million to September from the first quarter of 2022. Still, analysts said quarterly profit of the Dallas company was more limited than by the oil hedges. of his peers.
She had inherited numerous contracts from Parsley Energy Inc. and DoublePoint Energy, two companies she acquired last year. Last year, at the height of the pandemic, coverage had been the best option for many.
“It just seemed at that point that prices were going to come down for longer,” Dealy said. Pioneer and other producers are likely to cover their production less in the future as they keep capital budgets smaller and their balance sheets improve, he added.
Drillers who have gone the other way, and allowed themselves to be exposed to commodity prices, have reaped bigger profits this year. Continental has historically avoided locking in the prices of the oil it extracts from the ground, and has done so again this year. He now predicts he will collect $ 2.4 billion in free cash flow this year, more than double what he originally expected.
ConocoPhillips, which is not hedging because it has a heavy balance sheet, said it could afford to forgo oilfield profits and sharply cut production during last year’s downturn. It withdrew $ 4 billion in cash from its operations in the second quarter, far more than the $ 2.5 billion it needed to pay its shareholders and for its investments.
“I am surprised to hear that analysts do not ask the question to [producers] who are covered, what happened, ”ConocoPhillips CEO Ryan Lance said on a earnings conference call. “There might even be more cash flow if you hadn’t hedged your position. “
Continental and Diamondback did not respond to requests for comment. Devon declined to comment.
Analysts said shale companies are earning enough cash now to reduce their hedge positions. This year, their average return on free cash flow, based on enterprise value, is expected to be around 9%, according to an analysis by Raymond James. The sector closest to the Russell 3000 Index was energy, at around 6%.
But that will depend on how much money the drillers put back into oil production.
In calls for results, shale executives continued to downplay the possibility of increasing production in response to rising prices. Diamondback CEO Travis Stice told investors the global oil market is still artificially under-supplied because the Organization of the Petroleum Exporting Countries and its allies are withholding millions of barrels of oil a day that they could. inject into the market.
“There is no call for growth in shale production today,” Stice said.
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