Texas Shale Pioneers Struggle To Appease Investors

[Pavel + 384]

Seven years ago, Diamondback Energy Inc went public with a modest parcel of drillable land in the Permian Basin of West Texas.Like dozens of other Permian startups, the firm then pursued a classic wildcatter’s strategy - borrowing to buy up acreage, acquire competitors and quickly boost output in the booming shale field. Today, Diamondback (FANG.O) is the 7th largest producer in the top U.S. oil region, according to researcher Wood Mackenzie. But Diamondback differs from most of its peers in a crucial way - it’s poised to make more cash than it spends. The firm promised to reward investors by buying back up to $2 billion in shares and delivering $750 million in free cash flow next year if U.S. oil prices remain at about $55 per barrel. It started paying shareholders a dividend last year and raised it by 50% this spring. “That’s a big pivot for our industry, living within cash flow and not being part of that ‘drill, baby, drill’ crowd,” Diamondback Chief Executive Travis Stice said in an interview. Only a handful of independent shale firms collect more than they spend. Total overspending by a group of 29 such firms totaled $6.69 billion in 2018, according to Morningstar data provided to Reuters by the Sightline Institute and the Institute for Energy Economics and Financial Analysis. Diamondback was among the outspenders, but Morningstar projects it will produce free cash flow this year. The stark challenges facing the companies that pioneered the Permian signals a seismic shift in the shale economy - driven by investor demands for returns and a flood of investment from major oil firms including Chevron (CVX.N), Exxon Mobil (XOM.N), BP (BP.L) and Royal Dutch Shell (RDSa.L), with their boundless budgets and integrated operations stretching from the oilfield to the service station....

https://www.reuters.com/article/us-usa-shale-independents-insight-idUSKCN1UP10L?utm_campaign=trueAnthem:+Trending+Content&utm_content=5d403d15595b5a0001c3769b&utm_medium=trueAnthem&utm_source=twitter

 

[pinto + 293]

House of cards.

[Pavel + 384]

4 minutes ago, pinto said:

House of cards.

- Texas leads the nation in oil and gas production.
-1.1 billion barrels of oil were produced in Texas in 2016.
- 215/254 Texas counties produce oil and natural gas.
- There are nearly 250,000 oil and gas wells in Texas.
- In 2015, Texas produced more oil than all but 6 countries in the world.

[BALBOA + 37]

4 minutes ago, Pavel said:

- Texas leads the nation in oil and gas production.
-1.1 billion barrels of oil were produced in Texas in 2016.
- 215/254 Texas counties produce oil and natural gas.
- There are nearly 250,000 oil and gas wells in Texas.
- In 2015, Texas produced more oil than all but 6 countries in the world.

You are correct. Texas is the first with oil and...... guns!

[50 shades of black + 254]

Texas takes whatever finding is available for oil, gas, wind, solar, or any other funding on offer. Why should that surprise anyone?  Black gold...

[Douglas Buckland + 6,308]

11 hours ago, BALBOA said:

You are correct. Texas is the first with oil and...... guns!

A silly, childish response.

[Old-Ruffneck + 1,220]

2 hours ago, Douglas Buckland said:

A silly, childish response.

In what context was he using "Texas is the first with oil and..... guns"? I found it neither silly or offensive. 

[Ward Smith + 6,615]

15 hours ago, Pavel said:

- Texas leads the nation in oil and gas production.
-1.1 billion barrels of oil were produced in Texas in 2016.
- 215/254 Texas counties produce oil and natural gas.
- There are nearly 250,000 oil and gas wells in Texas.
- In 2015, Texas produced more oil than all but 6 countries in the world.

Pinto says, "Don't confuse me with facts, I've already made up my mind"

[Douglas Buckland + 6,308]

1 hour ago, Old-Ruffneck said:

In what context was he using "Texas is the first with oil and..... guns"? I found it neither silly or offensive. 

I did not say that I found it offensive, what I am trying to figure out is how his comment concerning guns is relevent to any discussion concerning oil.

[BALBOA + 37]

11 hours ago, Douglas Buckland said:

A silly, childish response.

So, it was a fairly benign comment.... You went into the trap of literal interpretation, I can not help you... I'll try something paraphrase. Most people are other people. Their thoughts are someone else’s opinions, their lives a mimicry, their passions are a micro world which only they understand...
 

[Jan van Eck + 7,558]

On 7/30/2019 at 9:42 AM, Pavel said:

The firm promised to reward investors by buying back up to $2 billion in shares

Buying back shares does not reward investors.  What it does is Segregate investors, by paying one group of investors with the cash that rightfully belongs to all investors.  The paid-off, bought-out group gets out of the game, their (presumed) profits now locked in.  The excuse offered to the rest is that now their shares become more valuable as the company's assets are divided by a lesser number of shares. But this is a fallacy: those shares are instantly worthless once the enterprise is unable to develop a continuing profit. And what assurance is there of that?  Remember that future performance cannot be guaranteed by past results.  

Share buy-backs are classically done when a company is doing well and its stock is appreciated.  Thus the company is effectively borrowing money from the capital markets, in the form of equity claims instead of a Note debt, and is paying it back at the buyback at an inflated cost.  And sometimes this is several multiples of the original cost.  You see these share buybacks at a stock price of $20 when the original shares were issued at $3.  I suggest that that is an unequal distribution of corporate assets. 

The remaining investors are in the constant gamble that reserves will be there, will be reachable at an economic level, and that world sales prices for oil will remain high enough to allow for a decent return on the invested capital.  As has been found many times, that is an optimistic assessment and a continuing risk. I would not be so sanguine about the prospect of Diamondback or any other player, nobody really knows how the whole Permian thing is going to play out.  About the only assurance of future profits I can visualize would flow from a Trump decision to tariff offshore oil at $10 a barrel.  Now, that would definitely improve the picture for the Permian!