[Editor's note: A version of this story appears in the May 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Tom Jorden, CEO of Cimarex Energy Co. (NYSE: XEC), had a bone to pick. Presenting deep into Day Two at the Scotia Howard Weil investor symposium in New Orleans, following a parade of marquee CEOs currying favor with investors, Jorden seemed miffed that his fine, Denver-based company had been lumped with E&Ps that had chased unbridled growth at the expense of returns. And he came out swinging.

“We are in business to make money,” he said at the event in late March. “We focus entirely on return on invested capital. We make investments for the return on capital, and we have a fairly stubborn conviction that in the long run, making money is what is in style. Tailoring our investments around any concern other than long-term profitability is a distraction.

“That may sound like motherhood and apple pie,” he conceded, but added, “every decision we make, whether drilling wells, adding midstream assets or buying land, we look at the full-cycle, fully burdened return on that capital. When it comes to returning value to our owners, fully burdened, full-cycle returns are the only returns that have meaning.”

Jorden’s passionate soliloquy came at a time when institutional investors have abandoned the E&P sector on Wall Street, frustrated by years of shale-addicted producers reinvesting capital with little shareholder reward. E&P stocks lag every other market sector. Faced with roomfuls of these skeptical energy investors, large-cap E&Ps pounded a steady drumbeat of emphasized their ability to generate free cash flow and returns on capital.

Repentance was at hand, it seemed.

Yet in spite of investors’ concerns that U.S. shale producers would flood and crash crude markets with oil above $60 per barrel, the operators also offered up measured, disciplined—and positive—growth projections.

“This is the beginning of free cash flow,” promised Dave Hager, CEO of Devon Energy Corp. (NYSE: DVN). “I want to make it very clear that this is just the beginning of what we can do.”

Oklahoma City-based Devon appeared to achieve critical mass in early March with the announced sale of its southern Barnett Shale assets for $553 million. Concurrent with that announcement, the company laid out a plan of investor-friendly incentives, including a $1-billion share repurchase program, a 33% increase in its dividend, and a $1-billion debt reduction initiative. The company designed its 2018 budget to be cash-flow positive above $50 WTI (West Texas Intermediate), with no intent to ramp activity to the upside, Hager said, and anticipates some $2.5 billion in cash generated by 2020 should oil average $60.

“We’re going to be a lean, efficient company that drives high returns,” he said. “We have the opportunity to generate significant free cash flow.”

Seismic Shifts

This vision is predicated on a shift from appraisal to “more pure development” in Devon’s Delaware Basin and Anadarko Basin Stack play. Hager couldn’t resist touting the size of the prize in these two areas. In southeastern New Mexico, Devon identifies up to 15 potentially productive intervals, of which seven will be targeted in multizone projects by year-end. In the Stack, its recent Coyote well flowed 8,200 barrels of oil equivalent per day on a 24-hour IP.

“The scale of opportunity is massive,” he opined.

Devon forecasts an overall production incline of 15%, with 25% growth in the Delaware and Stack. The cash flow part of the thesis currently comes from its producing assets in Canada, the Barnett Shale and the Eagle Ford Shale, and its ownership position in EnLink Midstream Partners LP (NYSE: ENLK).

Keeping to the theme of shareholder rewards, Dave Stover, CEO of Noble Energy Inc. (NYSE: NBL), projected a $1.5-billion cash accrual over three years on a $50 oil price scenario; $3 billion at strip prices. Using that bounty, Stover wooed investors with promises of a $750-million share repurchase program announced in February and a progressively increasing dividend tied to cash flow growth. The Houston-based company has also paid down $2 billion in debt over the past two years.

“With our ability to generate cash-flow growth; we are returning to double-digit corporate returns as a company and as an industry.”

Its Eagle Ford Shale and Denver-Julesburg Basin programs are kicking off excess cash now, while the Delaware Basin, Eastern Mediterranean and West Africa are in cash-burn mode still. Its U.S. and Eastern Med volumes will also increase by double digits annually, to the tune of 25% through 2020, Stover projected.

Steady As She Grows

EOG Resources Inc. (NYSE: EOG) reigns as an investor favorite in the E&P space—its stock price fared better than most over the past year though still down year-to-date—but even it wasn’t immune to spouting the mantra. Chairman and CEO Bill Thomas reminded the audience that EOG has averaged 13% return on capital employed (ROCE) over 20 years, and maintained its dividend all the while.

“We’re going to have an ROCE that’s not just a leader in the E&P business, but we’re looking to have ROCE numbers that are competitive with any company in any industry. We’ve reset the company to be successful even in moderate to low oil prices, and we’re going to have strong financial returns through the cycles.”

EOG’s goal in 2018 is to “return to double-digit ROCE” while achieving 18% production growth, following 19% growth in 2017.

“Our growth in the company is going to be super disciplined,” Thomas said. “We’re not going to grow the company faster than our learning curve. We don’t want to destroy returns just to grow the company.”

EOG’s “premium well” directive means it will only drill wells that return 30% at $40 oil and $2.50 per thousand cubic feet gas. At $60 oil, those returns jump into the triple digits, “the top of all wells drilled in the U.S.” Under this scenario, which describes the current environment, the Houston-based producer can hit its growth target and still generate $1.5 billion in free cash flow.

In the first quarter, the company rewarded investors by increasing its dividend 10%, and Thomas announced it would pay down a $350-million bond this year. “Our goal is to deliver long-term shareholder value,” he assured.

Others assuaged investors with the same message.

“We’re focused on production growth within cash flow,” said Jeff Ventura, CEO of Range Resources Corp. (NYSE: RRC). “We have $1 billion cumulative free cash flow” through the next five years at strip pricing.

“We didn’t wake up this year and decide [free cash flow] was important,” said Al Walker, CEO of Anadarko Petroleum Corp. (NYSE: APC). “We’ve paced investments in the upstream sector within cash flow.”

Vicki Hollub, CEO of Occidental Petroleum Corp. (NYSE: OXY), following a five-year portfolio transformation, said, “We can now protect our shareholders in a lower price environment. We can grow at $50 by 5% to 8%. Above $50 oil, we have more flexibility about how to use incremental cash.”

Jack Stark, president of Continental Resources Corp. (NYSE: CLR), added, “We’re starting to harvest two decades of inventory that we’ve assembled. We can fuel and feed positive cash-flow growth for years to come. The company has never been better positioned than it is today.”

Taking a bit different tack, Tim Dove, CEO of Pioneer Natural Resources Co. (NYSE: PXD), said Pioneer is restructuring its executive compensation incentive packages to link to metrics around price per share and ROCE. “It aligns with the fact that this is a company drilling very high rate of return wells and accordingly will show strong prudence in ROCE going forward.”

Pioneer’s ROCE today is 5%, which Dove projected to grow to 15% by 2026.

Additionally, the Dallas company has quadrupled its dividend and announced share buybacks equivalent to employee compensation rewards to offset dilution. It is marketing its Eagle Ford, Midcontinent and Raton assets to become a Midland Basin pure player.

“We’re executing a high-return plan that gets us to cash-flow generative,” he said.

Too Soon To FCF

However, not all companies presenting were ready to shift directly into development mode or to commit to free cash flow in the present, with promises of cash generation forthcoming at promised future dates.

Doug Lawler, CEO of Chesapeake Energy Corp. (NYSE: CHK), predicted his company, following years of righting the balance sheet and tightening operational efficiencies, would see cash flows in the black as early as this year after additional asset sales. Cash flow neutrality is a strategic goal, he said, with any excess going toward the company’s still-heavy debt load. The Marcellus remains the cash engine for the 70% gas-weighted company, but ongoing efforts in the Powder River Basin are gauged to increase oil volumes by 5% this year, he said.

But with debt reduction and cash generation duly noted, he said, “the most important thing on the list is margin enhancement. That’s what we directly control.”

Scot Woodall, president and CEO of Niobrara-focused HighPoint Resources Inc. (NYSE: HPR), the amalgamation of Bill Barrett Corp. and Fifth Creek Energy LLC, said he expected to achieve cash-flow neutrality in late 2019. In the meantime, HighPoint is still reaching for orbit at an 80% growth rate burn in 2018 and 70% in 2019.

Similarly, Chuck Stanley, CEO of QEP Resources Inc. (NYSE: QEP), projected tipping to cash-flow positive sometime in 2019, with an aggressive 70% growth rate through 2018. QEP is also divesting all non-Permian assets.

The Bottom Line

Maybe out of principle or possibly because it’s not in his strategy, Cimarex’s Jorden didn’t drop the free-cash-flow buzz words or mention any intent of share buybacks to the gathered room of money. The company’s $1.7-billion 2018 capital budget—focused on opportunities in the Delaware Basin and Midcontinent—is being funded from cash flow and cash on hand. Production should grow 11% if all goes according to plan.

“If you’re investing capital and making good returns, you ought to see production growth follow,” but “production growth is never a primary driver. Production growth and reserves growth are consequences of good investment decisions.”

Cimarex maintains a 16 cents per share dividend. Jorden did reiterate that the company is returns-driven and execution-focused.

“We’re having great returns on invested capital,” he said. “That’s the single measure by which we judge ourselves. Our business is reinvesting our cash flow and having returns that can hold up through the cycles, fully burdened with all costs. And we’ve seen some of the best returns on capital we’ve seen in our history.”

The quorum of E&P CEOs can only hope that investors get the message, and return to the oil patch.

Sidebar: Buybacks Are Bullish

Bernstein E&P analyst Bob Brackett, in a Feb. 21 report, confirmed the sentiment that E&P investors have shifted from desiring corporate growth to now wanting to see a return on capital, but posed the question, “In the meantime, will they settle for a return of capital?”

With WTI growing through the $50s at the end of last year and into the $60s this year, share repurchases are becoming immediate olive branches that large E&Ps can offer to beleaguered energy investors. Brackett identified some $6 billion in announced share repurchases (but not yet all enacted as buybacks) since third-quarter 2017.

“It is a remarkable change as we emerge from the downcycle, which saw a cumulative $60-plus billion of net equity issuance,” he said, suggesting a discipline better than during the last up or downcycle.

“After all, the land grab is over, management teams are (properly?) chastised, companies are running rig programs sufficient to provide attractive growth at strip, and thus is it perhaps time for the excess to return to shareholders.”

And buybacks would trump equity-fueled corporate acquisitions, he believes, although he deferred comment on what should be the “proper behavior” of private and private-equity-backed operators.

“For now, the larger public operators are sticking to the conviction of free cash flow,” he said.

Steve Toon can be reached at stoon@hartenergy.com.

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