It was clear at CERAWeek by S&P Global last week that public E&Ps would not go back to the drawing board anytime soon to rewrite their plans for returning billions of dollars to shareholders this year.
Those plans, laid out just a few weeks ago, were largely modeled on financial discipline and modest single-digit growth rates. To go back on those plans now would risk angering investors who are finally seeing the returns they have sought for years.
“I think investors are really concerned — and rightfully so — that the US shale business is just finding its footing as a business plan,” Tudor Pickering Holt President Chad Michael said at CERAWeek. “It struggled so much to get the plan to where it is today, which is as a really important, permanent part of global supply, that if you too quickly try and make the decision to take it from mid-single-digits growth to something much higher, are you going to end up breaking the business model again?”
Pioneer Natural Resources CEO Scott Sheffield said he was already getting feedback from investors.
“They’re saying, ‘Scott, do not grow more than 5%, regardless.’ If things get worse in supply-demand, if things get worse in Ukraine, you have hundreds of thousands of people being killed, I think there's a chance that mindset may change — if we get into that scenario," said Sheffield. "But none of us are gonna jump out."
Chesapeake CEO Nick Dell’Osso also struck a cautious tone. More growth is possible, he told Energy Intelligence, but the industry needs signals from the market that high prices and strong demand will be sustained for the long term.
“We're really all trying to stick to the discipline that has led us to a place today, where coming into this year we felt like we had a reasonable balance between supply and demand,” he told Energy Intelligence. “We want to keep that balance of supply and demand in place. So if the game changes, then I think this industry will change. But if the game is disrupted in the short term, then I think the industry needs to stick to its discipline.”
Supply Chain Looms Large
Investor concerns are not the only thing keeping a cap on US output growth. Producers are struggling with inflation, supply chain lags and labor shortages, all things that make it difficult to ramp up quickly and cost-effectively.
Sheffield said it would take about 18 months to grow production beyond current projections just to deal with supply and labor shortages.
In a recent note, Credit Suisse noted that attempting to meaningfully accelerate activity and capex in an inflationary environment would “adversely impact capital efficiency.”
Still another issue impacting growth is the lack of takeaway capacity in some regions, notably the Appalachian Basin.
“I'd start with what is needed in order to grow production,” Will Jordan, EQT’s general counsel, told Energy Intelligence. “The reality is, at least in the Appalachian Basin, which is where we're operating, we can't grow. If we grow, we can't sell anywhere other than into Pennsylvania markets, and we crater that market. A lot of our potential growth is dependent on incremental pipeline coming out of the basin, because we're running at capacity right now.”
ConocoPhillips Executive Vice President Tim Leach told conference attendees that a focus on infrastructure could provide a short-term solution.
“We need more offtake capacity, the pipelines to get the Canadian crude down to the refineries in the US so we can make more product,” he said. “We need those to move forward quickly. We need to be able to get our natural gas to the East Coast without putting it on ships. We need more infrastructure, and I think that's the short-term solution if anybody was seriously asking about the question.”