The first wave of mid-sized oil and gas exploration and production companies has reported, and the results are more encouraging than many had anticipated. Production levels remain relatively high — in most cases at or near year-ago levels — yet capital expenditures are way down.
This means companies are employing new technologies and learning to produce more with less. Capital efficiency is increasing dramatically.
Look at Marathon Oil, out last night after the bell. The loss of 20 cents was far less than the 40-cents expected loss. Sales volumes were higher than expected. Production expenses came in lower than expected. Capital expenditures for 2015 are being cut more than estimated, and projected capital expenditures for 2016 are also being slashed further.
Devon Energy also reported a sizable earnings beat (76 cents vs. 52 cents consensus), with production higher than expected, and spending lower than expected. For 2016, it looks like capital expenditures will be much lower, with production increasing in the low single-digits.
You see? Production steady, but spending much lower. Earnings somewhat better than expected. Doing more with less!
There was also Chesapeake Energy, which took a big writedown on its oil and natural gas properties, but even then, the loss was less than expected. Production growth was up 3 percent, but capital expenditures were down 35 percent quarter over quarter.
The goal for this quarter is to reassure the Street that: 1) commodity prices may remain low for some time and 2) we have the means to make money within the new capital restraints.
There's another story with some of the oil plays: lower debt expenses.
Look at Denbury Resources, a smaller E&P that operates in the Gulf Coast and rocky Mountain regions. The driller also had a good earnings beat due to lower than expected capital expenditures. Production is down slightly, but capital spending is down dramatically, and it is reducing spending even further in 2016.
Denbury had recently suspended its dividend, freeing up $88 million in cash. Much of that is going to reduce bank debt, which is now down to $210 million at the end of the third quarter, from $395 million at the end of 2014.
Look, these companies have had a terrible year and it's still debatable whether oil has bottomed. And many will look askance on the fact that production levels are still high and see that as a negative.
But it is stunning to see how they are finding ways to survive with oil in the mid-$40s.
Anyone who is looking at the oil and gas business and not marveling at the technological innovation and the effort to increasing operating efficiency is not paying attention.