Themes from Q4 Earnings Calls

Special Topics

The energy sector gained slight momentum in the fourth quarter as crude prices steadily increased from $54 per barrel at the beginning of October to $61 at the close of 2019.  The gradual increase in prices was fueled partly by optimistic market expectations in early 2020, and the announcement of the United States and China Phase One trade deal.  In early December, OPEC announced their intent to deepen production cuts through March 2020, applying upward pressure on prices.  However, $60 pricing was short-lived in 2020 as concerns regarding the coronavirus, and its impact on global growth and energy demand, sent WTI prices to the $40s.  In this post, we examine some of the most discussed items and trends from the Q4 earnings calls, specifically E&P companies and those in the mineral aggregator space.

E&P Companies

Operators experienced a positive earnings quarter to close 2019 as many beat expectations on both EPS and revenue.  Cost reductions coupled with an increase in oil production fueled organic growth and allowed E&Ps to produce a level of free cash flow to investors.  Participants on the calls were curious on the outlook for 2020, as topics discussed centered around the coronavirus and ESG (environmental, social, and governance) efforts moving forward.

Global Health Affecting Supply and Demand

Due to the calls occurring in early 2020, participants seemed inclined to question the outlook of the energy sector in light of recent news regarding the coronavirus.  Operators, Pioneer Natural Resources and Continental Resources commented on the subject.

  • “Obviously, more bullish, especially with U.S. shale essentially slowing its growth significantly going in 2020 once we get through the coronavirus demand issues. I’m more optimistic that we’re going to see a much higher price deck over the next five years.” – Scott Sheffield, President and CEO, Pioneer Natural Resources
  • “We see the oil and gas market as fundamentally oversupplied, with demand even further impacted by the coronavirus. By preserving our high-quality asset for a more structurally sound market; we are further enhancing future value for shareholders.” – Harold Hamm, Chairman, Continental Resources

The Wall Street Journal recently reported that that the coronavirus has sent natural gas prices to their lowest level in years, as natural gas futures for April delivery closed at $1.756/MMbtu.  Operators remain optimistic, however, that the outlook of the industry remains positive, assuming the virus is contained.

ESG Efforts Intensifying

  • “I want to highlight Continental’s continued commitment to ESG. As one of the leaders of the horizontal American energy renaissance and a major contributor to U.S. energy independence we are proud to be a part of the approximately 15% rollback in CO2 emissions that has occurred since 2006, thanks to the affordability and availability of clean-burning natural gas and light sweet crude oil produced as a result of horizontal drilling.” – Harold Hamm, Chairman, Continental Resources
  • “Every individual’s compensation is going to be tied to ES&G metrics. Things like water recycle, spill control, total recordable incidence rate, flaring, those are not subject to discretion. Those are quantitative measures that we will incentivize you know a better performance on. That’s one thing that we’ve proven at Diamondback is, what gets rewarded gets done and we intend to do that in our scorecard.” – Travis Stice, CEO, Diamondback Energy
  • “When you look at Slide #23, where the lowest of our peers in emissions intensity where Pioneer on both greenhouse gas intensity and also methane intensity. And what are the major changes we’re making in our ESG in regard to compensation, we’re increasing that these from 10% to 15% going forward in 2020.” – Scott Sheffield, President and CEO, Pioneer Natural Resources

Mineral Aggregators

As we discussed in a previous post, mineral aggregators have continued to attract equity capital in the energy space amid depressed investor sentiment regarding the industry as a whole.  While some mineral aggregators centered their attention on acquisitions heading into 2020, others were quiet and reiterated their patience that we covered in our third quarter earnings call post.  In the fourth quarter, Kimbell Royalty Partners declared a record financial performance along with their acquisition of the Springbok assets in the Delaware Basin.  On the other hand, Brigham Minerals emphasized their patient strategy, in search for larger mineral packages to meet their strict investment guidelines.  As the price environment remains uncertain, aggregators are being questioned with their strategy moving forward.

Uncertain Price Outlook Leading to Alternative Strategies

  • “That is primarily to give us more exposure to the upside when the gas markets do come back when – if they do, we’re – and also on the downside, adding cash flow to the system in 2021 and 2022 to hedge distributions. So we’re really – we’re playing it in a hedged manner. We’re going to keep a fair amount of exposure to the upside, but we’re also going to put some acreage into play now.” – Tom Carter, Chief Executive Officer, Black Stone Minerals
  • “We have received approval to add hedging to our program. We certainly if these prices aren’t going to be hedging oil but some sort of protection on both the spread side or even the gas Waha spread side given the outlook for permitting gases is pretty dire here in 2020. I think we’re looking to take that risk out of the Viper story. So we’ll be looking at the market and now have approval to hedge from a downside and spread protection perspective.”       –Kaes Van’t Hof, President, Viper Energy Partners
  • “It’s opportunities like this that only present themselves every three years to four years in terms of being a little consolidate and take advantage of this type of situation where people are concerned about crude oil prices. So, there is some time that has to go by. But I think our message is, if people are panicky, we can be patient and picky in terms of what we buy.”  – Robert Roosa, Chief Executive Officer, Brigham Minerals
  • “Oil, natural gas, and natural gas liquids revenues in the fourth quarter increased 18% compared to the fourth quarter of last year to $27.2 million. This increase reflects strong performance from acquisitions made in the past 12 months despite the decrease in realized commodity prices. While current pressures persist for many exploration and production companies operating in the U.S., our broad-based, high-quality asset portfolio continues to outperform expectations.” – David Ravnaas, President and Chief Financial Officer, Kimbell Royalty Partners

The difficult price environment in the energy industry is leading mineral aggregators to plan for the future.  The topics discussed revolved around strategies, particularly hedging and reinvestment, to capitalize on the unpredictable nature of the industry over the next few years.