December 7, 2017 Read More →

Investors Grow Weary of U.S. Shale Losses

Wall Street Journal:

Twelve major shareholders in U.S. shale-oil-and-gas producers met this September in a Midtown Manhattan high-rise with a view of Times Square to discuss a common goal, getting those frackers to make money for a change.

In the months since, shareholders have put the screws to shale executives in ways that are changing the financial calculus of hydraulic fracturing and could ripple through the global oil market.

In the past decade, the shale-fracking revolution has made the U.S. the world’s largest oil-and-gas producer and reshaped markets. Yet shale has been a lousy bet for most investors. Since 2007, shares in an index of U.S. producers have fallen 31%, according to data provider FactSet, while the S&P 500 rose 80%. Energy companies in that time have spent $280 billion more than they generated from operations on shale investments, according to advisory firm Evercore ISI.

The shale boom continues in places such as Midland, Texas, where a frenzied land rush has driven oil-and-gas-acreage price tags to new highs and the smell of crude wafts over highways thick with 18-wheelers hauling fracking equipment to the Permian Basin.

The persistently paltry returns—and incongruous boom scenes like those in Midland—prompted the Manhattan meeting, which included portfolio managers and fund officials holding a total of nearly 5% of shares in 20 large shale companies, say several attendees.

The participants, which included giants such as Invesco Ltd. and smaller shareholders including Sailing Stone Capital Partners LLC, occasionally stopped to express doubts, these attendees say. Several wondered aloud: Are these guys really capable of change?

They came away determined to force operators to turn profits in part by changing compensation practices that critics say reward CEOs for increasing production no matter what, say participants including Todd Heltman, a senior energy analyst at Neuberger Berman Group LLC, an asset-management firm that owns shares in shale producers.

In following weeks, normally cordial discourse at company presentations and investor meetings occasionally grew tense, according to shareholders, shale executives and bankers familiar with the discussions.

At a Houston steakhouse in September, shareholders questioned Anadarko Petroleum Corp. Chief Executive Al Walker and other company leaders about what they planned to do with $6 billion in cash on the balance sheet. Anadarko’s stock price had fallen almost 40% in 2017, and several shareholders feared Anadarko would spend the money on questionable drilling campaigns, according to people familiar with the meeting. When executives declined to provide details, one investor grew frustrated and walked out, some of the people say.

A week later, Anadarko announced plans to buy back $2.5 billion in stock rather than pour money back into production. The company also changed executive compensation metrics to focus more on returns and to reward growth only if it comes without increasing debt or issuing new shares.

The chorus of shareholders calling for change goes beyond the Manhattan meeting. In a letter to Continental Resources Inc., which Continental shared with The Wall Street Journal, Trent Stedman of Seattle-based Columbia Pacific Advisors LLC wrote that listening to CEOs outline big production growth plans “has become as unpleasant as fingernails on a chalkboard.”

As a group, U.S. shale companies have been forecasting they are on the brink of generating free cash flow—taking in more revenue from operations than they spend on new investments—for the first time since 2014, when oil traded at over $100 a barrel. Since then, they have largely repeatedly moved those goal posts back.

Wood Mackenzie estimates that if oil prices hover around $50, shale companies won’t generate positive cash flow as a group until 2020. Even then, only the most efficient operators will do well, says Craig McMahon, a senior vice president of research for the consultancy.

Returns from individual wells can be good, but shale wells tend to pop online with a gush and then peter out fairly quickly. That has meant operators sink profits back into more new wells that can take another two years to become profitable, with shareholders told to hang on for a payday.

“The mañana never quite materializes,” Mr. McMahon says.

More: Wall Street Tells Frackers to Stop Counting Barrels, Start Making Profits

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