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Will Investors Receive More Returns From US Shale Producers?

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The sentiments of investors have changed drastically regarding businesses in the U.S. shale spaces. Oil producers are not in a position to give more focus on drilling in the domestic shale resources as investors are demanding further returns from the explorers, stated John Hess — CEO of Hess Corporation (HES - Free Report) .

Hess added that since 2017, investor’s current priority has changed to ‘show me the money’, from ‘drill, baby, drill’. Lower focus on production will eventually draw less money toward investment. This will be a serious concern as low long-term capital spending will further reduce production in the coming years.

Per our proprietary model, through 2017, the companies belonging to the Zacks U.S. Oil & Gas Exploration industry collectively generated $1.2 billion of net operating cashflows, from which $0.9 billion was allocated toward capital spending. The remaining amount of $239 million was free cashflow, from which only $65 million was paid as dividends to the investors. Hence, investors received 6% of the entire operating cashflows.  

It seems that investors are not happy with the percentage of return — considering only dividend payments and excluding share buybacks. In other words, they are asking shale explorers not to spend so much capital for operations.

Along with long-term production threat, the U.S. shale players are exposed to limited short-term domestic production possibilities — especially in the Permian Basin — following pipeline bottleneck problems. Producers that are exposed to Permian pipeline bottleneck are Energen Corporation , Apache Corporation (APA - Free Report) and Noble Energy Inc (NBL - Free Report) .

The Permian region has always been in the spotlight when it comes to oil and natural gas production in the United States. In terms of production, Permian has recorded higher reserve than Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville and Niobrara. From nearly 1 million barrels a day of crude at the beginning of 2009, Permian’s daily production is now heading toward 3.5 million barrels, per the U.S. Energy Information Administration (EIA).  

However, Permian is now facing limited pipeline capacity for transporting oil to Gulf Coast export facilities, major refinery terminals and principal hubs like Cushing. This is because drillers have been pumping out more oil as crude prices are favorable, which exceeds the capacity of the Permian.

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