Heatmap
America’s
oil and gas industry is beginning to pull back on investments in the face of
tariffs and immense oil price instability — or at least one oil and gas company
is. While
oil and gas executives have been grousing about low prices and inconsistent
policy to any reporter (or Federal Reserve Bank) who will listen, there’s been
little actual data about how the industry is thinking about what investments to
make or not make. That changed on Wednesday when the shale driller Matador
Resources reported its first quarter earnings. The company said that it would
drop one rig from its fleet of nine, cutting $100 million of capital costs. In response to
recent commodity price volatility, Matador has decided to adjust its drilling
and completion activity for 2025 to provide for more optionality,” the company
said in its earnings release.
In
February, Matador was projecting that its capital expenditures in 2025 would be
between $1.4 and $1.65 billion. This week, it lowered that outlook to $1.3 to
$1.55 billion. “We’re very open to and want to have reason to grow again,”
Matador’s chief executive Joseph Foran said on the company’s earnings call
Thursday. “This is primarily a timing matter. Is this a temporary thing on oil
prices? Or is this a new world we live in?” Mizuho Securities analyst William Janela wrote in a note
to clients Thursday morning that, as the first oil exploration and production
company to report its earnings this go-round, Matador would be “somewhat of a
litmus test for the sector: we don't believe the market was expecting E&Ps
to announce activity reductions this soon, but MTDR's update could signal more
cuts to come from peers over the next few weeks.” West Texas Intermediate crude oil prices are currently
sitting at just below $63, up from around $60 in the wake of President Donald
Trump’s “Liberation Day” tariff announcements. While the current price is off
its lows, it’s still well short of the almost $84 a barrel crude prices were at
around this time last year.
The price decline could be attributable to any number of
factors — macroeconomic uncertainty due to the trade war, production hikes by
foreign producers — but whatever the cause, it has made an awkward situation
for the Trump administration’s energy strategy. The iShares U.S. Oil & Gas Exploration &
Production ETF, which tracks the American oil and gas exploration industry, is
down 9% for the year and more than 13% since “Liberation Day,” while the rest
of the market has almost recovered as the Trump administration has indicated it
may ease up on some of his more drastic tariff policies. If other drillers follow Matador’s investment slowdown,
it could imperil Trump’s broader energy policy goals.
Trump has both encouraged other countries to produce more
oil (and bragged about lower oil prices) while also exhorting American drillers
to “drill, baby, drill,” with enticements ranging from kneecapping emissions
standards to a reduced regulatory burden.
As Heatmap has written, these goals sit in conflict with
each other. Energy executives told the Federal Reserve Bank of Dallas that they
need oil prices ranging from $61 to $70 a barrel in order to profitably drill
new wells. If prices fall further, “what would happen is ‘Delay, baby, delay,’”
Wood Mackenzie analyst Fraser McKay wrote Wednesday. “We now expect global
upstream development spend to fall year-on-year for the first time since 2020.” A $65 per barrel
price “dents” margins for drillers, meaning “growth capex and discretionary
spend will be delayed,” McKay wrote. Matador also announced that it had authorized $400
million worth of buybacks, and its stock price rose some 4% on the earnings
announcement, indicating that Wall Street will reward drillers who pull back on
drilling and ramp up shareholder payouts.
“We’ve
got the tools in the toolbox, including the share repurchase, to make Matador
more value quarter by quarter,” Foran said. Rather than “blindly” pouring
capital into growth, Matador would aim for a “measured pace,” he explained.
“And if you mean what you say about a measured pace, that means when prices get
a little lower, you take a few more moments to think about what you’re doing
and don’t rush into things.”