“In our business, certainly today, scale equals relevance.” That was one of the first things that Darrin Henke, President and CEO of Eagle Ford Shale-focused independent producer Ranger Oil Company told me in our recent interview. We were talking about the factors that led to his management team’s decision to create Ranger Oil by merging its predecessor, Penn Virginia, with fellow Eagle Ford operator Lonestar Resources, Inc. last October.
“The size of Penn Virginia, a small publicly traded company, previously just didn’t generate a lot of excitement (among Wall Street investors),” Henke said. “Strategically, we knew that if we could do smart, accretive acquisitions, it would make a lot of sense.”
Henke pointed to the fact that, through the merger, Ranger Oil now boasts 50% higher production and free cash flow, and 60% larger land position and proven reserves than Penn Virginia’s prior positions. Numbers like that definitely generate more excitement with investors, and that has become the name of the game in America’s shale oil and gas business today.
As if to emphasize these points, just before this story went live, Ranger announced it had completed a series of “bolt-on” acquisitions of acreage adjacent to its existing holdings totaling $64 million. This additional 17,000 acres increases Ranger’s total holdings to 155,000 net acres, more than a 10% increase from year-end 2021.
The days of an active rig count of 2,000+ in North America generating oil and natural gas drilling and fracking booms in half a dozen major shale plays across a dozen states are gone, at least for the foreseeable future. Despite global demand for more oil and gas, much stronger commodity prices and the sudden new interest from the Biden administration for more domestic energy production, the focus of corporate independent producers like Ranger Oil is on performance metrics like free cash flow and rewarding investors with higher returns.
Few companies have been as successful in meeting this new industry-wide paradigm as Ranger has been. “We are blessed with the #1 EBITDAX
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margin of any publicly traded independent over the last 18 months,” Henke said. “With that type of margin, we can really generate a lot of free cash, and that’s allowed us to pay down our debt. Our leverage ratio into this quarter will approach 1 times, and with that low a leverage ratio, we’ve announced some shareholder-friendly initiatives. We have a share repurchase program of $100 million that starts in the 2nd quarter. Starting in the 3rd quarter we’re going to implement an annual dividend of 25 cents per share, we’ll do that quarterly at 6.25 cents per share.
“And we’ll continue paying down debt. By the end of this year our RBL should be paid off and we’ll have a lot of dry powder for whatever makes sense to be doing with that additional free cash flow.”
One thing Henke and his team will not be doing with that free cash flow is implementing major increases in the company’s drilling program. “We haven’t had shareholders on our doorstep demanding we grow our production and out-spend our cash flow like the industry did for many years,” he told me. “That’s certainly not what is being rewarded in the market now.”
But Henke does believe Ranger will be able to increase production even with a stable drilling program employing the same number of rigs as in 2021.
“What will be unique about this year is we’ll be materially increasing our lateral lengths,” he said. “On average, we’ll drill 31% longer laterals this year than what we did last year. It’s amazing what you can get done with that same pace of activity, and that will lead to high single-digit growth to double-digit growth in production year-over- year.”
During our interview, Henke pointed with great pride to the fact that his 6-person leadership team now boasts 4 women. He credited Penn Virginia’s previous management team for creating “an inclusive environment” that has enabled that rare result in the oil and gas business to come about in an organic way, as more and more women come into and excel within what had traditionally been a male-dominated industry.
This is the name of the game in the U.S. oil patch now. This focus on ESG-related goals, operational efficiencies and increasing investor returns now drives decision making at most corporate independents and the majors, and it helps to explain why the U.S. supply response to these high commodity prices will continue to be muted when compared to that seen during previous price spikes.
It has been this way for a while now. Thirteen months ago, I pointed to this new paradigm for success that was then leading the industry into a different sort of oil and gas boom in a piece titled “Not A Fracking Frenzy: What The New Shale Oil Boom Will Look Like”:
“This muted drilling response will in turn produce a more muted supply response from the U.S. shale industry. Instead of the phenomenal, unprecedented rise of about 3 million barrels per day in U.S. production seen during the previous boom, we should anticipate something more in the half-million barrel per day range by the end of 2022.” Rather than a traditional drilling and production boom, I pointed out that the industry would experience a boom in things like stronger balance sheets, efficiencies and technological advances, per-well results and ESG-related advances.
In other words, all the things Henke and other corporate CEOs point to today when describing their companies’ metrics for success. Politicians and op/ed writers might criticize the U.S. industry for not producing the traditional supply response to ever-rising global demand for oil and gas, but those drilling frenzies of the past have been a big creator of the problem with the industry’s intractable boom-and-bust cycles.
These companies are not charitable organizations. They exist to generate profits, and these management teams have a fiduciary responsibility first and foremost to the demands of their investors. Henke and his team at Ranger Oil provide us with a clear example of a shale industry that is getting back to those basics. Over the long run, that new focus is likely to result in a healthier, stabler and more sustainable business environment.
