In our prior earnings call post, Themes from Q4 2023 Earnings Calls, we touched on the global focus that both the Upstream and OFS segments had focused on and the persistent drive to optimize efficiency in well operations and services with technological advancements, durable inventory, and more. This week, we explore the Q1 2024 earnings calls of upstream and OFS companies, highlighting the appearance of this quarter’s themes across the entire sector.

Dividends and Buybacks

E&P operators and OFS companies have experienced moderate profitability in recent quarters, using this earnings power to make significant shareholder distributions and share repurchases. Q1 followed this trend, with many upstream and OFS companies highlighting their buyback and distribution policies during their earnings calls.

E&P

• “Considering both share repurchases executed during the first quarter and our annualized regular dividend we have already committed to return about $2.9 billion this year, which represents more than 50% of that free cash flow, so we are well on our way to return a minimum of 70%. And while cash return exceeded free cash flow during the first quarter, we continue to view our return commitment on an annual basis. During the first quarter, we repurchased 6.4 million shares for $750 million, averaging about $118 per share. Since we began using our buyback authorization at the start of last year, we have bought back more than 15 million shares or nearly 3% of shares outstanding for an average price of about $115 per share. To date, that totals about $1.7 billion worth of shares. We will continue to monitor the market for opportunities to step in and repurchase shares throughout the year.”
  – Ann D. Janssen, Executive VP & CFO, EOG Resources, Inc.
• “I think philosophically, part of the move back to 50% of free cash flow returned every quarter allows us to build more cash, pay down debt faster, but also make the bigger bets on buybacks, right? In a single quarter, if you’re having to distribute 75% of your free cash flow, you don’t get to really make the big bet on the buyback at the right time. And so this flexibility will allow us to do that…If we see some weakness, we’re going to step in and support the stock. But longer term, we want to make the 9-figure, 10-figure bets on buybacks at the right time, and that’s the flexibility we want on capital return.”
  – Matthew Kaes Van’t Hof, President & CFO, Diamondback Energy Inc.

OFS

• “The baseline that we use is the framework that we announced several quarters ago to return a minimum of 50% of free cash flow to shareholders. We actually returned over that at just about 60% in 2023. So when we look at the improvements in free cash flow year-over-year, which we mentioned to be at about 10%. So when we think through that, we think that the $250 million of buyback is a good base for us to be repurchasing shares. So expect more buybacks in dollars, expect more overall return to shareholder dollar-wise.”
  – Eric J Carre, Executive VP & CFO, Halliburton Company
• “We believe base dividends provide an immediate direct benefit to all shareholders. Two, we plan to opportunistically repurchase shares under our new $1 billion, 36-month share repurchase authorization. With our share price trading below what we consider a fair value, we believe using some of our excess free cash flow to repurchase our shares will drive long-term value. Three, at the end of each year, we plan to utilize the supplemental dividend that would be payable in May, starting in 2025, to coincide with our Annual Shareholders Meeting to true up our total annual return of capital to at least 50% of our excess free cash flow generated during the preceding calendar year.”
  – Jose A. Bayardo, Senior VP & CFO, NOV, Inc.

Gas Market Electrified for the Future

During the latest Q1 earnings calls, both E&P and OFS companies highlighted an anticipated uptick in the gas market. While short-term natural gas prices may remain low, the long-term outlook is bullish. This optimism is fueled by rising domestic electricity consumption and increased export demand.

E&P

• “And while we expect the natural gas market to remain soft through the end of this quarter, much like last year, we expect it to strengthen through the second half of the year and are managing our Dorado program to align with demand. Longer term, we expect an additional 10 to 12 Bcf a day of demand for LNG feed gas and another 10 to 12 Bcf per day of demand from several areas, including overall electrification, exports to Mexico, coal power plant retirements and other industrial demand growth. So the outlook for North American natural gas by the end of this decade is bullish, both for the industry and in particular, for our Dorado dry gas play which has advantaged access to the Gulf Coast and pipeline infrastructure..”
  – Ezra Y. Yacob, CEO & Chairman, EOG Resources Inc.
• “We illustrate the significant expected natural gas demand growth coming from LNG exports, Mexico exports, along with this increasing electric power generation need. Combined, these are expected to result in an increase in demand of 30 Bcf by 2030, an increase of over 100% from the same demand sources today. It is in the early innings of increasing electrification demand. We believe there has been a structural shift toward reliable, clean and affordable natural gas that will continue to increase power burn demand annually going forward This demand grade, combined with rising LNG and Mexico exports, creates a significantly higher base demand level than we have ever experienced in the past. We expect these fundamentals will provide support to natural gas prices and lead to periods of higher prices in the coming years.”
  – Justin B. Fowler, Senior Vice President of Gas and Marketing & Transportation, Antero Resources Corporation.

OFS

• “In the U.S., after stable electricity demand for nearly two decades, we now expect it to grow more than 15% by 2030. Today, over 40% of United States’ electricity is supplied by natural gas, and we expect strong demand for natural gas as a base fuel well into the future. The world requires more energy, not less, and I’m more convinced than ever that oil and gas will fill a critical role in the global energy mix for decades to come. My outlook is confirmed by our customers’ multiyear activity plans across multiple markets and asset types. Everything I see points towards long-term growth for Halliburton’s services.”
  – Jeffrey Miller, President, Chairman & CEO, Halliburton Company.
• “And even though natural gas prices have contracted, long-term gas demand is very robust, particularly with electricity demand rising rapidly and new LNG demand slated to come online in 2025 and 2026. Accordingly, in a gas basin like the Haynesville, long-term water gathering and disposal agreements from steady production sources remains an attractive growth option, especially when integrated with our market-leading disposal footprint supported by our uniquely positioned gathering pipeline network.”
  – Chris George, Executive, Select Water Solutions, Inc.

Mercer Capital has its finger on the pulse of both the upstream market and the oilfield service space. 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. This includes E&P operators, mineral aggregators, and ancillary service companies crucial to starting and maintaining the stream’s flow. For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.