As earnings roll in, there are lessons to be learned about how oil companies continue to handle the current price bust (yes, oil at $45 is still a bust).
Two of the U.S. independents reporting this week, Hess (HES) and Pioneer Natural Resources (PXD), show vastly different approaches, with Pioneer continuing to increase production at all costs and Hess showing restraint on spending until oil markets recover.
Despite the appreciation Wall Street is giving Pioneer for its plan by ratcheting up share prices while Hess' fall, I believe Pioneer's approach is the trap to be avoided, while Hess is the opportunity to be embraced.
Pioneer's CEO Scott Sheffield has been singular in his goals during this bust in oil prices. It's been about maintaining production growth throughout. Indeed, in his latest quarterly report he broke his company record again, delivering 220,000 barrels of oil equivalent, an increase of 7,000 barrels of oil equivalent (BOE) over the fourth quarter of 2015. But revenues from this gain in production, with oil below $50 a barrel, have not translated to the kind of cash flow that PXD will need to continue to keep beating its own records. With a projected $1.4 billion in cash flow for 2016, Sheffield will still come in $600 million short of his own guidance for covering capital expenditures for the year. With that kind of cash burn, it'll need a seriously large asset sale, or a much less likely secondary stock or bond capital infusion. That's not a strategy for an oil price that remains below $50 for very long.
What Sheffield is doing is trying to run faster than everyone else and pray that oil and gas prices catch up to him before the debt problems overtake him first. In this, he could be right. I'm one of those who think oil will get incredibly hot in 2017, but what if the turnaround takes a bit longer than I think it will? Pioneer, at the huge valuation it currently has compared to its proven reserves, will turn out to be the "motherfracker" David Einhorn believes it to be.
Now, look at Hess. CEO John Hess was quick to begin his quarterly comments by noting a lower-for-longer strategy. This corresponds to the $1.6 billion stock secondary it did in February, shoring up their balance sheet for the long haul. Inside the United States, it's pared back fracking operations in both the Bakken, where it currently operates only two wells and in the Utica shale, where it currently operates none. It's assigned much of their capex for 2016, lowered 40% from 2015 levels, to offshore projects in the Gulf of Mexico and Guyana. These are growth projects that reflect a long-term investment return on capital that current shale assets onshore cannot deliver. But with revenues missing by $47 million for the quarter and down 36% from 2015, Hess shares were pummeled, dropping below $60 a share.
In my world of oil investment, it has been the wildcatting, all-in risk-takers that have generated the fastest gains when they win and delivered the wickedest losses when they lose. In today's depressed oil environment, Scott Sheffield at Pioneer has taken over from Aubrey McClendon of Chesapeake (CHK) as the prime big-stack chip player at the oil table. But that's not what we want for a prime long-term investment in a recovering oil patch.
What we want is a measured survival tactician, like Bill Thomas at EOG Resources (EOG) and John Hess have proven to be.
That's why I see these so-called disappointing Hess results as an opportunity and recommend buying more if shares creep down again closer to $50.
And avoid Pioneer at the lofty share price it has reached.