As the oil industry continues to recover from the deepest downturn in a generation, profits are returning, but companies are operating differently and have a somewhat different focus.
That’s a key takeaway from spending this week listening to analyst conference calls as Oklahoma City’s largest oil and natural gas producers reported first-quarter earnings.
Most of the state’s surviving oil companies have returned to profitability. One notable exception in the first quarter is Devon Energy Corp., which recorded a $197 million loss, but that number doesn’t reflect the company’s operations. The loss was led by a $312 million noncash charge because the company bought back $807 million in debt.
The charge illustrates one key difference in the way companies now are operating. A few years ago, oil firms primarily were focused on increasing production. Most were willing to take on debt and sell new stock in an effort to drill more wells in more areas.
Today, however, companies are focused on drilling only the best-return wells and are using cash from operations and asset sales to repay debt ahead of schedule.
“In the first quarter, we recognized material progress in enhancing our margins, achieving positive free cash flow and reducing our net debt,” Chesapeake CEO Doug Lawler said Wednesday. “The underlying strength of our operations coupled with higher realized prices resulted in our best financial performance since before the downturn of 2014.”
Reducing Chesapeake’s debt and otherwise boosting the balance sheet have been central goals for Lawler since he joined the company in 2013. The focus on increased cash flow now is widespread throughout the industry.
Continental Resources Inc. and Devon both historically have operated with relatively low debt levels, but they, too, have a renewed focus on fiscal responsibility.
“The first quarter was all about execution and delivering on our guidance of cash flow positive growth,” Continental President Jack Stark said Thursday.
Besides repaying debt, Devon executives also have led the company to buy back shares and increase the dividend.
“Looking ahead, as we generate free cash flow from operations and asset sale proceeds, we will continue the return of cash to our shareholders through our share repurchase program and growth in the dividend,” CEO Dave Hager said Wednesday.
Lower debt levels and a narrower operational focus on the strongest producing areas can help companies wade through a still-uncertain price environment. Most companies have set conservative budgets, assuming oil prices much lower than today’s levels. The sharp price drop beginning in 2014 burned many companies and reminded executives of the risks involved in such a highly volatile, price-dependent industry.
The other key reason for the renewed focus on debt, cash flow and shareholders is that Wall Street is demanding it. Oil and natural gas producers generally saw their stock prices fall last year even as the broader stock market experienced record gains. Oil executives hope to help their stock prices and shareholders see gains this year.