Oil companies are focusing on profits

Oil industry executives are surely pleased with themselves this year, with both large and small companies reporting improved financials after years of struggling.

A Reuters survey finds a significant shift towards profitability for the U.S. shale industry after years of rising debt and negative cash flow. Reuters analyzed 32 independent shale companies, and about a third of them were cash flow positive in the third quarter. That may not seem all that great, but only three companies out of those 32 had positive cash flow a year earlier.

In fact, years of cost cutting is paying off for many companies, many of which have aimed to breakeven with oil prices at $50 or $60 per barrel. Not all are there, to be sure, but the increase of oil prices this year pushed many into profitable territory. The oil majors, on the other hand, are the most profitable they have been in years.

Last week, the Wall Street Journal pointed out the different stock performances of companies that pursue these different strategies. Over the past year, ExxonMobil’s share price has been flat, as it has announced an aggressive spending plan and multi-year campaign to grow production. Meanwhile ConocoPhillips is shrinking, selling off assets, and focusing on shale drilling and shareholder returns. Exxon’s share price is flat, but Conoco has jumped by 25 percent.

Already the oil majors are slipping. “In 2008, the energy sector commanded roughly 16% of total Standard and Poor’s 500 market capitalization. Today, that figure has fallen to roughly 6%,” Sanzillo and Hipple wrote in a commentary. “In 1980, seven of the top 10 companies in the index were oil companies. Today, only ExxonMobil is in the top 10 (ranking tenth).”

The recent fall in oil prices will probably solidify the newfound “capital discipline” approach by many oil and gas companies. At this point, that’s what Wall Street wants, and most executives in the industry appear willing to keep spending in check, having been burned by repeated downturns in prices over the last few years.

“Companies largely stated prioritization for returns and [free cash flow] instead of growth,” Goldman Sachs wrote in a note to clients after meeting with executives from several oil companies, including Occidental Petroleum, Apache Corp. and Range Resources.

Investors are pleased that the industry is finally focusing on profits, and not simply growth. The flip side is that to some degree the industry is throwing up the white flag in terms of long-term growth. It’s not clear what that means five or ten years from now, but at this point, most oil and gas companies are focusing on near-term shareholder returns, not growing reserves for the next few decades. It’s a decidedly short-term strategy. But with peak oil demand and a climate crisis looming, that probably makes the most sense.