Shale Firms Face Investor Frustration
(Bloomberg) -- Shockwaves in the c-suites of shale companies are showing investor frustration with an industry that continues to outspend cash flow.
Independent drillers such as Alta Mesa Resources Inc. and Centennial Resource Development Inc., whose leaders were once rewarded for amassing vast portfolios of drilling rights, are now being punished for failing to convert those holdings into profits. Even bigger players, like Pioneer Natural Resources Co. are feeling the heat.
Crude prices have never fully recovered from the 2014-2016 slump and investors have soured on the sector, undermining explorers dependent on regular cash infusions to finance drilling. In the past week alone, two prominent shale bosses departed their companies and a third saw his creation lose about 75 percent of its value. Meanwhile activist investors are beating the doors of at least 10 American drillers, urging management teams and directors to retire or sell out.
“Although the whole shale revolution appears to be quite powerful, if you look just under the hood, you see that every company has to run faster and faster to achieve growth,” shale pioneer and Centennial Chief Executive Officer Mark Papa said on a conference call Tuesday after releasing disappointing production numbers.
Centennial, which focuses on the Permian Basin that straddles West Texas and New Mexico, was created on the back of investors’ trust in Papa, 72, who built EOG Resources Inc. into what’s now the world’s second-largest independent oil producer by market value. Centennial tumbled Tuesday -- the shares are now down about 27 percent for the week -- after cutting the number of rigs it plans to deploy this year and pushing back the date for when it plans to stop outspending its cash flow.
Other high-profile figures in shale have fared even worse. On Feb. 21, Floyd Wilson, a wildcatter famed for the $10.5 billion sale of Petrohawk Energy Corp. to BHP Group, was ousted as CEO of Halcon Resources Corp. as activist investor pressure mounted after the company struggled to find enough cash to drill its leases. On the same day, Pioneer said it was bringing back founder Scott Sheffield to replace Tim Dove as CEO.
And on Monday, Alta Mesa Resources Inc., run by former Anadarko Petroleum Corp. CEO Jim Hackett, said it will take a writedown of about $3.1 billion because of a "material weakness" in its financial reporting. That sent its shares plunging as much as 69 percent and left its bonds trading at distressed levels.
"Expectations are high for operational execution and, as we’ve seen recently, the margin for error is often razor thin with little forgiveness from an investor base that is wondering if the underlying value proposition of the industry has more material issues," Macquarie Group Ltd. analysts said Wednesday in a note.
Perhaps the biggest challenge for these companies is how close to one another oil wells can be drilled. If spaced too tightly, newer wells -- “child wells” -- can be less prolific than the “parent.” But too far apart and drillers risk leaving oil in the ground. It’s a serious problem that affects companies’ capital efficiency, said Brandon Myers, a Houston-based analyst at Wood Mackenzie.
“The issue for the entire Permian Basin relates to parent-child wells,” Papa said on the call. “Companies are going to have to pedal harder every year to get the kind of growth that perhaps they’ve been promising."
“You’re getting data points every quarter from companies where they talk about, ‘Gee whiz, I thought I could drill 1,000 wells on my acreage and it turns out I can only drill 600 wells on my acreage’ because of, essentially, parent-child issues," he added.
Bigger companies are less at risk because they have more land to drill. But smaller publicly traded players and those backed by private equity typically drill more marginal locations in an effort to prove they have oil, with a view to selling the lease later on. With investors demanding immediate returns, some operators have had to switch to production mode, pitching them into direct competition with larger rivals for capital and services such as drilling and pumping.
For Alta Mesa, optimistic production targets proved unattainable. Created by Hackett in a three-way merger completed last year, the company’s operations are located in a lesser-known section of the Stack oil basin in Oklahoma. While that initially offered the promise of cheaper acreage, the company repeatedly missed production forecasts. Hackett took back the reins in December after its market value dropped from $3.8 billion to less than $500 million.
"The rocks are the rocks, and it doesn’t matter whose name is on it," said Subash Chandra, an analyst at Guggenheim Securities LLC. "If the assets are mediocre, $50 oil is a major problem."
In the northeast, gas driller EQT Corp.’s challenges with well spacing are partially behind a battle with the founders of a company it acquired in 2017. With the backing of major investors including D.E. Shaw & Co., brothers Toby and Derek Rice have been urging directors to depose the current CEO and install Toby Rice in his place, among other operational changes. Laredo Petroleum Inc. and Matador Resources Co. have also faced questions about how they space wells.
“We’re at a point now where operators are really resetting expectations, and they’re taking corrective measures,” said Shak Ahmed, a research analyst at RS Energy Group. “We expect that to actually improve results going forward, but it’s obviously a pretty painful process getting to that point.”
--With assistance from Ryan Collins.
To contact the reporters on this story: Rachel Adams-Heard in Houston at firstname.lastname@example.org;Kevin Crowley in Houston at email@example.com
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