In Part 1 (E&P Operators) and Part 2 (Mineral Aggregators) reviews of Q4 Earnings Calls, prevalent themes among the E&P Operator calls included cost inflation, a shifting focus towards liquids, and policy headwinds towards the Oil & Gas industry.  Among the mineral aggregators, common themes were capital discipline, flat production growth, and the strength in the position of aggregators amid the highly inflationary environment.

This week, we take a holistic upstream perspective on the themes of both the E&P operator and mineral aggregator earnings calls for Q1.

The Future Role of U.S. Production in the European Market

Russia invaded Ukraine on February 24, 2022.  Global markets blinked, and commodity futures skyrocketed.  In the weeks following the invasion, European nations discussed plans to phase out sourcing energy from Russia. With OPEC holding firm on its production plans, attention turned towards the U.S. — the world’s largest hydrocarbon producer and a vocal supporter of sanctions towards Russia.  Upstream Oil & Gas companies recognize that their role in supplying European energy markets, and the global market generally will grow.

• “As the war in Ukraine and the resulting governmental sanctions continue, Russia’s oil production is expected to be impacted by shut-ins, natural declines, storage limitations and lower exports, creating a global shortage of oil.  Over the next few years, we will need to make up for this lost production, and we believe that the U.S. oil and gas industry is best suited to provide the low-cost environmentally-friendly barrels needed to ensure global energy supply.  However, today, we are operating in a constrained environment with inflationary pressures continuing to increase across all facets of our business.  Also labor and materials shortages are now present across the supply chain…[an] increase in activity now would result in capital efficiency degradation that would not meaningfully contribute to fixing the global supply and demand imbalance in the oil market today.”
  – Travis Stice, Chairman and CEO, Diamondback Energy
  
• “The reality is that energy markets were already tightening from supply and demand fundamentals before this Russian action, and the risk premium now embedded in commodities, including oil and gas has returned with a vengeance.  Even in the unlikely event of a near-term resolution to this crisis, the die has been cast and actions, particularly by European countries are already underway to move away from Russian oil and gas and secure more reliable supply from the Middle East and the U.S.  It has underscored the need for an orderly energy transition that includes oil and gas as part of all of the above strategy, and has recalibrated global views as to the current and ongoing role of U.S. oil and gas in the world economy.”
  – Lee Tillman, Chairman, President and CEO, Marathon Oil
• “On the supply side, the shift towards maintenance capital plans and supply chain constraints led to moderated global supply growth.  Then during the first quarter of 2022, this bullish fundamental backdrop was further strengthened by the geopolitical events in Europe.  Unlike prior commodity price spikes, these events had a large impact on the futures curve, where we saw the natural gas strip move up 45% throughout the curve all the way to calendar year 2026.  As Europe looks to strengthen its energy security, it has become clear that there will be a significant call on U.S. shale gas in the coming decades.”
  – Paul Rady, Chairman, President and CEO, Antero Resources
• “Recent world events have highlighted the global strategic importance of U.S. gas reserves, and we believe the Haynesville shale is the best position play to benefit from continued growth in LNG export volumes over time.”
  – Tom Carter, Chairman and CEO, Black Stone Minerals

Confidence of Continued Favorable Pricing

In Part 1 (E&P Operators) of the Q4 earnings call themes, we noted upstream companies’ strong desire to reap the full benefits of the pricing environment.  Executives focused on shorter-term deals, unhedged positions, and a more opportunistic approach when it came to derivatives contracts.  With fewer hedges in place or shorter-term contracts, operators continue to pursue maximizing their upside from continued price appreciation or a prolonged favorable pricing environment.

• “We’re happy where we are right now on shorter-term deals, whether it’s selling on the day or on the month.  We’re not interested in longer-term supply deals unless we receive significantly higher premiums.  There is too much optionality today to get in prematurely.  We are virtually unhedged on all commodities in 2023.  This attribute will allow us to capture the upside to growing LNG and LPG export demand.”
  – Paul Rady, Chairman, President and CEO, Antero Resources
• “As we look to 2023, we have positioned the portfolio with a good base layer of hedges.  With strength in the oil and natural gas, we’ll opportunistically add 2023 hedges over the remainder of this year.  However, we expect to hedge less volumes, or said another way, a lower percentage of production than we have historically.”
  – Kevin Haggard, Senior Vice President and CFO, Callon Petroleum
• “If oil prices were to average $60 for the remainder of the year, Pioneer’s shareholders would receive approximately $17 in dividends per share.  At $120, approximately $31.  Shareholders have significant upside on higher oil prices as we have zero 2022 oil hedges.”
  – Scott Sheffield, CEO and Director, Pioneer Natural Resources
• “While the Permian led all of the basins in terms of growth in rig count, we believe strong natural gas prices will compel improved activity in the Haynesville, Marcellus and Mid-Con as we continue through 2022.”
  – Bob Ravnaas, Chairman and CFO, Kimbell Royalty Partners

Completions Trending Up

Upstream operators commonly noted that their Q1 completion rates increased, with expectations that completions will continue to increase throughout 2022.  This is an encouraging sign for aggregate production.

• “[Regarding] completions, our field team continues to see really good improvements and they’ve increased their overall completed lateral per foot per day by 10% compared to 2021.”
  – Jeff Leitzell, Executive Vice President-Exploration & Production, EOG Resources
• “As you mentioned, 11-wells went online earlier, and they are performing above the type curves.  We still have six more to turn online, making 23 Eagle Ford for this quarter.  And we have even more wells set to come online in the Eagle Ford through third quarter.  It is very early, but we’re very excited about the wells coming online earlier and at higher results.”
  – Molly Smith, Vice President of Drilling and Completions, Murphy Oil
• “The decrease in oil volumes was primarily a result of lower suspended revenue volumes received in this quarter as compared to last quarter.  Our staff successfully worked with producers in the second half of last year to release suspended production volumes across our mineral position…  Given the temporary nature of these items and combined with the generally positive industry environment and the ramp up in activity, we expect to see the Haynesville and Austin formation shock through our organic growth programs.  We expect that growth trajectory to resume throughout the year.”
  – Jeff Wood, President and CFO, Black Stone Minerals
• “Strong commodity prices during the quarter translated into increased activity on our acreage as evidenced by the 20% increase in the rig count actively drilling on our acreage at no cost to us.  In addition, line of sight inventory from our major properties increased 6% sequentially to 5.03 net DUCs and permits.  This is notable since we only need approximately 4.5 net wells completed each year to keep production flat.”
  – Bob Ravnaas, Chairman and CFO, Kimbell Royalty Partners 
• “Looking ahead, our net activity well inventory, which represents the combination of our drilled but uncompleted locations, or DUCS, in our permits was 11.7 net locations at the end of the first quarter, our net DUCs and inventory at the end of the first quarter stayed roughly flat versus the fourth quarter, despite our extremely strong aforementioned DUC conversions.  We anticipate that PDC, Chevron, Pioneer, Oxy, and Diamondback will convert the majority of our DUC inventory.”
  – Rob Roosa, CEO, Brigham Minerals

Conclusion

Mercer Capital has its finger on the pulse of the minerals market.  As the oil and gas industry evolves through these pivotal times, we take a holistic perspective to bring you thoughtful analysis and commentary regarding the full hydrocarbon stream, including the E&P operators and mineral aggregators in the upstream space.  For more targeted energy sector analysis to meet your valuation needs, please contact a Mercer Capital Oil & Gas Team member for further assistance.