School of Mines report: Stockholder pressure will limit oil & gas production increases

As gasoline prices move well past the $4 per gallon mark in Colorado and around the country, motorists can expect no help for the remainder of this year from increased oil and gas production.

A quarterly report from the Colorado School of Mines Payne Institute concluded that pressure from stockholders to increase returns on investment, coupled with some supply-chain constrictions, will mean that “production growth likely remains modest and employment gains moderate through 2022.” The report was authored by Brad Handler, Payne Institute program manager, based upon financial reports and industry statistics through the first quarter of 2022.

“The top priority for the U.S. public oil and gas companies remains to deliver higher financial returns to shareholders,” the report said. First quarter financial reports from publicly traded oil and gas companies showed efforts to pay higher dividends to stockholders and to buy back shares of their own stock.

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And higher dividends and stock buybacks are possible because oil prices at the wellhead have spiked, from $29.14 in the second quarter of 2020 to $119 per barrel today. 

“It is worth highlighting that there is no evidence to suggest that federal policy is having a constraining impact on onshore industry activity,” Handler wrote in the report. Oil companies have access to both private and public land through existing leases, he said.

Oil and gas companies are spending more, and some have increased their expense budgets for the year, but that was mostly to make up for increased prices driven by inflation, not to increase production. 

Rig counts in the industry are up, although not yet at pre-COVID levels. Drilling activity has been constrained, the report said, by short supply of certain steel products needed for production — products that were removed from the supply chain during the pandemic. 

Russia’s war with Ukraine likely will have long-lasting impacts because U.S. and European nations have curtailed imports from Russia. In Europe, Russian gas will likely be replaced by imports of liquified natural gas from the United States. LNG plants are operating at or near capacity and have sought authorization to expand capacity, the report said.

Oil and gas companies are forecast to have robust cash flows, in some cases up 70%, and some have committed to return as much as 50% of their cash flow above levels needed to maintain production to investors, the report said.