The Fuse

At IPAA OGIS Summit, Small Number of Companies Reveal Strong Positioning for Price Recovery

by Matt Piotrowski | April 12, 2016

The second day of the independent producer OGIS (Oil and Gas Investment Symposium) summit in New York was an upbeat gathering, relatively speaking given the level of turmoil, bankruptcies and downgrades in the U.S. shale patch.

Companies presenting at the Independent Producer Association of America (IPAA) OGIS event told investors how they have been able to weather the current downturn and are well positioned for when prices trend upward.

While those presenting showed positive signs, what’s more noteworthy are the players who didn’t present. Bigger fracking firms such as Devon, Continental and Hess, which attended meetings in past years, did not present this time around.

While those presenting showed positive signs, what’s more noteworthy are the players who didn’t present. Bigger fracking firms such as Devon, Continental and Hess, which attended meetings in past years, did not present this time around, perhaps a strong sign of how much duress the industry is dealing with right now—and a lack of desire to air their financials during a time of intense stress.

Bright spots in a gloomy industry

Pioneer, which is active in the Permian with 12 rigs there, had a lot of good news, and believes more is yet to come. The company’s CEO Scott Sheffield said it is performing better than its peers because, simply, it has a strong balance sheet. “Everyone else has a bad balance sheet,” he said.

The industry was too optimistic going into 2015-16, Sheffield said, failing to learn from previous downturns. Companies, though, will likely learn from the current cycle and will operate with lower leverage going forward.

The company currently has zero debt and is 50 percent hedged–but doesn’t want to be too locked in because Sheffield believes the market will continue to strengthen and hit $50 by late 2016 or early next year. “Attractive” hedges helped strengthen the company’s balance sheet throughout the past couple of years, providing a lot of help during the current environment.

He also stated that his company is better positioned than others to take advantage of a price rebound. “When prices rise, we can jumpstart much quicker than the rest of the industry,” he told investors.

The company, which has plans for a robust $2 billion in capital expenditures this year and 10 percent production growth, will add 5-10 rigs if prices reach $50 per barrel, and more if the market hits $60. Sheffield is positive about the OPEC/non-OPEC freeze meeting this weekend in Doha. Although he said “it doesn’t mean a lot,” it’s good that producers are talking about the oversupply.

The CEO of Matador Resources said it is also well positioned as the company has kept up with its long-term outlook.

“Each time I present here, the circumstances are different,” he said. Before, “rigs were short and prices were plentiful; now prices are short and rigs are plentiful.”

He said 2016 shows promise for his company and the industry. “I’m no macro expert, but maybe the worst is behind us.”

He believes his company is in fact in its best shape ever due to having cash and access to capital, good acreage, and a strong technological team. It is particularly active in the Eagle Ford and it will remain in the Delaware Basin for a long time to come. It has hedged over 50 percent of its production for the rest of 2017 between $44-$66, giving it good protection but also the flexibility to take advantage of any price rises.

Matador is a good success story of the shale boom, representing the massive growth over time. In 2003, it was a $6 million company, and it had no debt until 2010. In 2012, it launched an initial public offering. Since then, oil output has risen 28-fold, proved reserves have skyrocketed 3-fold, and its share price is up 70 percent. It is now approaching $2 billion in market cap.

Still, turbulence continues

Although many wanted to show their best at OGIS, it’s hard to mask what the industry is facing right now. Many have had to cut staff, most (except for the outliers such as Pioneer) are not growing production. Prices remain almost $70 per barrel below the 2014 peak. Almost all are still vulnerable to bankruptcy.

“Don’t be too positive,” one asset manager told The Fuse. “Many are one step away from going under.”

The shale industry has seen a lot of bad news, and more will come, but as a number of presenters noted, certain well-positioned players will thrive when prices recover.