The exploration and production sector just reported its “best organic free cash flow since shale began,” according to an analysis of first-quarter results by Bob Brackett at Bernstein Research.
Most notably, less than half of cash flow from operations was swallowed up in capital expenditure. This not-spending-everything approach may seem like finance 101 but is actually pretty radical stuff for the shale business. Look at 2012 to 2016 on that chart. Such profligacy led investors to abandon the sector, finally forcing some discipline.
Secular bull markets in commodities are about the rising cost of marginal production. Decades of little investment in new supply in the energy sector created conditions that required a decade of overinvestment in new supply to compensate for rising demand. Ahead of the bull market in the early 2000s, the marginal cost of production was somewhere around $20, today that level is closer to $40.Click HERE to subscribe to Fuller Treacy Money Back to top