In the first quarter of 2020, oil benchmarks ended arguably their worst quarter in history with a thud. The concurrent overlapping impact of (i) discord created by the OPEC / Russian rift and resulting supply surge; and (ii) the drop in demand due to COVID-19 related issues was historic. Brent crude prices began the quarter around $67 per barrel and dropped to $50 per barrel by early March before plummeting to $19 per barrel by the end of the month. WTI pricing behaved similarly although it continued to trail Brent pricing by a narrowing margin (about $5 per barrel) at the end of the quarter. For context, WTI recovered to a range of roughly $25 per barrel to $30 per barrel relative to when the earnings calls occurred in late April and early/mid-May. As of yesterday, WTI closed at $37.29 per barrel. Natural gas has trended downward but has been more stable in the U.S. as its pricing is generally more tied to region-specific factors.
This week, we examine some of the most discussed items and trends from E&P companies’ Q1 earnings calls. We will turn our attention to those in the mineral aggregator space in a subsequent post.
Operators experienced mixed earnings in the first quarter. Although operators started the year with a positive outlook, the events that occurred in March quickly forced them to reconsider their forecasts. Investors and participants were far less concerned with earnings figures for the quarter than future implications of current events.
Theme 1: Setting Priorities During Uncertain Times
Operators seemed inclined to comment on their priorities moving forward. Making cuts to capital expenditures was predicted and unanimous among the group; however, the operators discussed other measures that they are implementing to combat the current depressed environment.
- “Paying our interest expense, retaining our people and paying our dividend remain our priorities through these uncertain times.” – Travis Stice, CEO, Diamondback Energy
- “First, optimizing our cash flow by adjusting our spend rate, production and cost structure. Second, maintaining a strong balance sheet. Third, continuing to return capital to shareholders through our dividend. And finally, maintaining flexibility to cut further while also preserving our operational capacity.” – Timothy Leach, Chairman & CEO, Concho Resources
- “Our capital allocation priorities are balance sheet, dividend and capital spending.” – Scott Sheffield, Chairman & CEO, Pioneer Natural Resources
Theme 2: Maintaining Bank Relationships in Times of Need
Banks will continue to play a substantial role as many of the operators relied on tapping into their credit lines and/or other debt instruments to satisfy liquidity needs.
- “Our banks are very strong. Our credit facility is strong. We don’t have covenants really in there, debt-to-capital covenants, only one we have, and we’re well south below that and we’re not in any realm of even approaching that. Our debt would have to go up by $8 billion to hit that covenant level. So, I told you we’ve got a lot of cushion.” – John Hart, CFO & Treasurer, Continental Resources
- “As of today, the undrawn capacity on our credit facilities total $6.75 billion. We believe a strong balance sheet is essential to succeeding in this industry and we are committed to maintain our investment grade credit rating.” – Don Templin, CFO, Marathon Petroleum Corporation
Theme 3: Prepared for the Worst While Hoping for the Best
Many operators focused on their individual advantages to convey their resilience during the difficult pricing environment.
- “Diamondback is prepared to operate in a lower oil price environment and our cost structure will prove to be a differentiator through this downturn. Low interest expense, low leverage, industry leading low cash G&A, a full hedge book, strong midstream contracts and benefit of Viper and Rattler will allow them to operate effectively through these uncertain times.” – Travis Stice, CEO, Diamondback Energy
- “Just as Pioneer entered this downturn as one of the best positioned companies, we will emerge just as strong. The key points here, obviously, is maintaining our top-tier balance sheet through capital discipline, combined with significant cost reductions in 2020.” – Scott Sheffield, Chairman & CEO, Pioneer Natural Resources
- “We still have levers we can pull if conditions deteriorate further, and we will maintain flexibility to make additional cuts to our spending.” – Timothy Leach, Chairman & CEO, Concho Resources
Theme 4: Providing Flexibility with Liquidity
E&P companies are attempting to maximize liquidity to allow financial flexibility.
- “Just to be on the safe side, we did increase our liquidity position in early April by adding a 364-day credit facility, a little over $900 million that get our liquidity up to $2.4 billion.” – Scott Sheffield, Chairman & CEO, Pioneer Natural Resources
- “We’ve taken steps to maintain our financial flexibility. We’ve secured $3.5 billion of additional liquidity, including a new $1 billion 364-day revolver, and issued $2.5 billion of senior notes.” – Mike Hennigan, CEO, Marathon Petroleum Corporation
- “With our reduction in spending, current hedge protection and suspensions of our buyback program, we expect to maximize liquidity and retain cash to pay down debt.” – Travis Stice, CEO, Diamondback Energy
There is no question that E&P companies were forced to react quickly during the first quarter of 2020. Macroeconomic events mixed with a global pandemic slashed demand and caused prices to plummet. The operators tried to convey their confidence and resilience with their strategies moving forward. Time will tell whether they come out of this situation as stronger companies.