As the price of crude soars to above $85 a barrel for the first time in seven years, some are asking if we are back to the boom times of the early 2010s?
A recent Bloomberg article ‘Why Surging Oil Prices Have a Lot to Do with Capital Markets” argues that, far from a return to the ‘good old days’ of plentiful and cheap capital, the U.S. shale game has changed forever.
So, what are these changes? And how do energy businesses position themselves for success as they face these new market realities?
The boom years
Wind the clock back to the early 2010s and you’ll enter an era where years of cheap borrowing costs encouraged energy companies to tap capital markets to fuel their rapid growth. At the time, eager investors would readily hand over a mix of bonds, loans, and equity to unprofitable energy firms, with expectations of future growth and profits.
“Back then, the companies were rewarded based on volumetric growth, not on return on equity.”
– Jeff Currie, Global Head of Commodities Research, Goldman Sachs
When cash flow became king
Everything changed when the price of oil collapsed, including a fundamental reset in the relationships between energy companies and their investors. This milestone was symbolized by Anadarko Petroleum Corp’s announcement in 2017 that, rather than invest in more production capacity, it would simply return $2.5B to shareholders through a stock buy-back.
Investors had become fatigued with the industry’s pursuit of top-line growth. Instead, reduced spending, higher returns, and increased cash returns to shareholders became the priority.
“Today, the focus is on ROE” (Return on Equity) says Jeff Currie, Global Head of Commodities Research at Goldman Sachs Group Inc.,
Scott Sheffield, CEO of Pioneer Natural Resources, supported this claim in a recent earnings call, saying “We used to spend every dollar to drill a well.” Now “the free cash flow, …essentially all goes back to the shareholder base.”
No turning back
Enter 2021, and with oil prices soaring to levels not seen since the early 2010s, the question must be raised: Are we back to the good old boom days where investors step in to finance a fresh round of drilling and new production in U.S. shale?
The answer appears to be a definitive no. Many investors still feel the sting of the previous slump, and some have stopped investing in the space entirely. Furthermore, not only have investors gotten accustomed to cash returns at the expense of future investment, but also both operators and investors face new headwinds, primarily in the form of environmental concerns and the rise of impact investing. All of this seems to suggest that the ‘growth at any costs’ model is officially dead, and will never return.
“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent. All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies,” said Sheffield, describing the fundamental shift in the industry.
New game, new rules
The transition from top-line growth to bottom-line cash flow comes with a new set of rules for energy companies. Today, investors value reliable returns above everything else. Instead of being the best at exploration, it’s those companies that truly understand the performance of their assets today—and make smarter investment decisions to optimize current and future cash flows— that will be the ones that are rewarded by investors in terms of new capital.
The challenge for the energy industry is that most previous investments in performance improvement have focused on ‘front office’ exploration and drilling.
How energy can optimize asset performance
Understanding the commercial performance of assets in the energy industry isn’t easy. There’s no shortage of data, but it comes from a huge number of different sources and in a wide variety of formats. For example, E&P operators can have as many as 12 different sources for well headers alone.
This is where the lessons from other industries can be usefully applied. Many other sectors have adopted modern data platforms that enable businesses to ingest data from multiple sources, manipulate it to their liking, and then surface it in a manner that informs smarter decision-making.
By taking these lessons and applying them to the energy industry operators and investors have the opportunity to move away from point solutions and siloed data, to instead having a master view of a business through a connected data layer. This data layer can be utilized to quickly run complex scenario analyses and financial modeling to inform smarter strategic decisions, ultimately leading to higher returns for operators and their investors alike.
Zeno’s Energy Operating System was built from the ground up to connect the entire business through data, surfacing key insights for smarter, faster decision-making. Learn how Zeno helps businesses thrive in the new market realities of the Production Era by getting in touch.