Themes from Q2 2023 Earnings Calls

Part 1: Upstream

Special Topics

In Part 1: Upstream themes from Q1 2023 Earnings Calls, notable themes included a divide on whether dividends or buybacks are the best means to return capital to shareholders and management’s reactions to a decline in strip prices, as well as highlighting inventory in the favorable Permian and Eagle Ford plays. This week we focus on the key takeaways from Upstream Q2 2023 earnings calls.

Management Teams Seek Alternative Routes to Maintain Production Levels

A parallel to the theme explored in our review of last quarter’s upstream earnings calls was the norm of maximizing the return of capital to shareholders. In their Q2 earnings calls, upstream executives commonly highlighted a lesser focus on exploration activities and capital-intensive development, instead seeking to maintain production levels via other means. E&P operators have been acquiring and continuing to operate legacy assets with low decline rates, refracturing wells (refracs), well workovers, and infill drilling to offset inventory that is continuously shut in.

  • “We continue to see very limited competition domestically on any exploration, I think . . . you can . . . see that . . . in the public comments that are made. Most operators, companies, whether private or public, have really kind of picked the basin and are honing in on more of a drill down kind of specialist manufacturing mode.”
    – Ezra Yacob, Chairman & CEO, EOG Resources Inc.
  • “Our approach with refracs is as we’re pulling together a fun development, we’re looking at our primary infill . . .  — we’ll have a look at the section, and we’ll determine [if there is] a potential refrac candidate or refract candidates in the section . . . those opportunities have to compete for capital on a heads-up basis with all of the other opportunities. So rest assured, we’re doing refracs. They are profitable and they are competing with infill opportunities.”
    – Michael Henderson, COO, Marathon Oil Corp.
  • “We’re pleased to see that . . . given the fact that everybody else that seems to be reporting . . . a lot of disappointing production declines in the [Haynesville] Basin. I would attribute it to . . . that legacy position that we picked up . . . in 2018 [which] is just an incredible core Haynesville asset. And we would probably argue that our production should and will continue to be more resilient than other folks. I think we have a lower PDP decline rate on our Haynesville position relative to a lot of other people, too. So, it doesn’t require quite as much. . . . We will outperform . . . the more hyper-drilling folks that have newer flush production with higher decline rates. So, we’re kind of in a nice balance spot with a lower PDP decline, right, but still a healthy amount of activity.”
    – Davis Ravnaas, President & CFO, Kimbell Royalty Partners L.P.

Upstream Companies Expect the Already Low Global Oil Inventory Levels to be Drawn Even Lower

In the Q2 earnings calls of upstream companies, leaders made note of the future pressures likely to affect the global crude oil supply. These pressures are effectuated by U.S. operators keeping a steady production pace despite generally showing discipline from large development plans to maximize capital efficiency, as well as the minimal refinery capacity and the expectations that OPEC+ will follow through with their announced production cuts.

  • “Oil demand has been resilient despite volatility in the first half of the year, and demand is showing signs of continued growth through the second half of the year. Strong inventory drawers since the start of the year have pulled oil inventories below five-year averages and refinery utilization remains high. Production growth in the U.S. is on pace to deliver similar rates as 2022, while exiting the year with significantly less activity as public companies continue to demonstrate discipline. And it appears OPEC+ are following through on announced production cuts. The culmination of these actions should further reduce inventory levels and place upward pressure on pricing through year-end.”
    – Ezra Yacob, Chairman & CEO, EOG Resources Inc.
  • “As you all know, crude has been range bound between $65 and $80 over the previous several months [and] has been suppressed by SBR releases, recessionary fairs, and weak economic data from China. The recent upward move in oil prices reflects the expectation for tightening supply-demand fundamentals in the second half of this year. . . This outlook is further supported by Saudi Arabia’s production cuts and ABS’ preference to stabilize Brent oil prices at $90 or higher. I do expect Saudi to extend their 1 million-barrel a day cut they initiated [on] July 1 toward the end of ’23. I see these factors leading to demand outpacing supply, resulting in global inventory draws during the second half of [2023]. The expected demand increase, combined with the underinvestment by [the] industry over the last several years, are both supportive for oil pricing in the $80 to $100 range for the remainder of [2023] and through [2024] on.”
    Scott Sheffield, CEO, Pioneer Natural Resources Co.
  • “The case to be for us remains a maintenance oil production level. That means we’re going to be . . . targeting [a] . . . notional 10,000 barrels of oil per day. So, no real surprises there. And in fact, even at a capital allocation level, I wouldn’t expect to see change in terms of the mix amongst even our assets as we look ahead to 2024.”
    – Lee Tillman, CEO, Marathon Oil Corp. 

Despite Record Production in the Haynesville Shale, Drilling and Completion Activity Drops as Gas Prices Continue to Fall from the 2022 Highs

Natural gas prices, as benchmarked by Henry Hub, continued to fall in Q2 2023 from a recent high in August 2022 with an average spot price of $8.81/mcf. The average spot price in the second quarter was $2.16/mcf, below prior recent lows in the first quarter, which averaged $2.65/mcf from January through March 2023.1 Per EIA data, the rig count in the Haynesville region during June 2023 was 52, representing a 23% decline from the 73 rigs in December 2022 and a 22% decline from the 72 rigs in March 2023.2 Some executives expect that the decrease in drilling and completion activity (of which the effects on the natural gas supply will likely be felt both in the near term as well as in 2024 ) combined with a steep decline profile in the region will balance the U.S. natural gas market and provide upward price support to gas prices.

  • “As it stands today, the Haynesville rig count has declined by 38% or 25 rigs from peak levels. This point is driven home further when looking at the reduction in completion crews in the Haynesville. . . Since the beginning of the year the completion crew count has declined by 36% from 28 to 18 crews. While the decrease in drilling rigs will have a downward impact on 2024 supply, this reduction in completion crews will have a more immediate impact on supply this year. The sharp decline in drilling rigs and completion crews combined with the basin’s steep decline profile is expected to help balance the U.S. natural gas market and provide support to gas prices.”
    – Justin Fowler, Senior Vice President, Antero Resources Corp.
  • “Despite the pullback in natural gas prices and production, our hedge portfolio performed as it was intended to help insulate our cash flow from significant price movements. We generated total production volumes for the quarter of 36,200 BOE per day, a decrease of 8% from the first quarter volumes. Royalty volumes decreased 9% from last quarter at 33,600 in BOE per day . . . [the] primary driver was reduced gas volumes in Louisiana Haynesville, and we saw the natural decline as we saw the natural decline of several high interest, high initial production rate wells that came online in the second half of 2022.”
    – Tom Carter, Chairman & CEO, Black Stone Minerals LP

Mercer Capital has its finger on the pulse of the upstream 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 comprising the upstream space. For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.

1 “Henry Hub Natural Gas Spot Price”, Energy Information Administration, Available online at

2 “Drilling Productivity Report”, Energy Information Administration, Available online at