Energy portfolio manager details new strategy shale execs may use

By Luke Geiver | September 26, 2017

Executives of shale-focused exploration and production companies need to take note of Anadarko Petroleum’s recent move to perform a share repurchase program of $2.5 billion, according to Shawn Reynold’s, portfolio manager for VanEck’s Natural Resource Equity Group. Reynolds, formerly an exploration geologist and an analyst, told North American Shale magazine that Anadarko’s move could have meaningful repercussions on the shale industry into the future.

Although a share buyback is typically undertaken when a company believes its common shares are undervalued, Reynold’s said the financial maneuver could signal an inflection point in the industry that will impact oil prices and the value of shale energy companies. According to Reynold’s oil companies could be shifting out of all growth modes into strategies that provide a stronger focus on return capital or dividends to shareholders.

New Operating Models

In the past, E&P’s were focused on growth—through acreage holdings and barrels produced. “The traditional business model was the exploration model,” Reynolds said. “It was high risk, high return and it was all about the next discovery. Every day you woke up and your reserves and the value of your company was less than it was the day before unless you found a way to replace your reserves so you were always on this scramble to find out where the next barrel was coming from.”

Under the old model of business, the greatest risk to E&P’s and investors was geologic risk. “The shale model has taken the geologic risk and reduced it to almost nothing,” he said. With the risk of geologic failure gone for most shale-targeted wells, many companies have 20 to 40 years of resources embedded in their acreage. Operators are now becoming industrial manufacturing firms that are looking to lower costs and improve efficiencies, Reynolds said. Because of the decreased geologic risk and proven ability of most operators, the risk for investors and shale resources is more visible and lower than in the past.

Today, most operators are reporting year-over-year production rate gains, and in some cases, companies are reporting double digit gains depending on the price of oil. “For us [energy investors] that should lead to a much higher valuation because there is lower risk and more stable growth,” Reynold said.

Now, because investors understand the risk in shale and geologic areas across the country have been proven, operators should begin to shift away from the old model and into a new shale development model that is less about rapid growth and more about stable production and delivering returns to investors. The investment community, Reynold’s said, is now looking for their operating company leaders to change their mindsets. “What investors want is moderate growth with good returns generating cash,” he said. “Investors want to see free cash returned to them,” and not used to buy more acreage or increase production.

Oil Prices And The New Model

Should operators adopt this new operating model to meet the desire of their investor clients, oil prices could benefit, Reynold’s said. “There is going to be a portion of capital available that normally would have gone toward production but will go back to shareholders,” he said. “By doing that, the supply should be less than otherwise and certainly less than what is currently in the market.”

A focus on moderate growth and better shareholder returns could stabilize shale production numbers, thus stabilizing oil prices at a higher price, he believes, without the mystery of how monthly shale production numbers will impact the global oil supply and demand curve.

If a company like Anadarko is able to make their move in strategy work, Reynold’s said many others could or will follow. The nature of shale development allows for such moderation in growth, he adds, which makes this point in the industry’s young history unique. “The industry is going to go through a profound shift,” he said. “They are just embarking on it now.”