Even as prices rise and economics improve, as they have so far in 2021, it is unclear how aggressively companies will be investing in the oilfield. A survey of companies at the end of 2020 projected US capital spending levels only slightly higher than the depressed levels of 2020. Plowback percentages already had been trending down for several years as capital markets began to shift their expectations about the US shale business from a growth mode to a return mode. Those trends translate to less production, which leads to shortages and higher prices. Higher oil prices, along with cost-cutting, have boosted earnings reports in 2021. Many of these companies have already started to reduce debt and set higher targets for dividends and share repurchases. Companies have three primary paths they can take with the extra cash generated in such an environment:
- Return it to shareholders. This may be the route taken by some smaller independents that lack access to capital.
- Reinvest in the core business. Larger independents not actively looking to transition to alternative energy businesses may be more likely to exercise this option.
- Invest in decarbonization and alternative energy. Integrated companies, several of which are European-based with stated net zero carbon goals, are much more inclined to follow this path.
The decisions oil and gas companies make in this regard are likely to color how they’re viewed by investors, and those views have important implications. Companies that go all in on reinvesting in the core business but fail to attract external capital will get a strong signal about where investors see the future of the industry. To date, upstream investment has shown no sign of returning to pre-pandemic levels. Scarce capital and growing demand may continue to push prices higher, though, offering attractive returns to those willing to continue to invest in the sector.
With ESG considerations increasingly factoring into investor decisions, companies face further pressures. For the first time, this year’s study incorporated ESG issues to highlight the industry’s growing focus on sustainability and nonfinancial goals.