Colorado oil, gas industry sends huge profits to Wall Street while tapping brakes on production

With their profit margins exploding, the handful of corporations that control the vast majority of Colorado’s oil and gas production continued in the first half of 2022 to funnel cash to shareholders and restrict investments in new drilling, earnings reports show.

At Civitas Resources, formed through mergers between five large Colorado drillers, CEO Chris Doyle bragged of his company’s “significant free cash flow which we are aggressively returning to shareholders.”

Meanwhile, despite lower-than-expected production totals, Denver-based PDC Energy touted $250 million in second-quarter shareholder returns through dividends and stock buybacks — more than its entire operating budget in Colorado’s oil-rich Wattenberg Field during that period.

“PDC is poised to have its most successful financial year in its 50-year history,” Scott Meyers, the company’s chief financial officer, told investors in an earnings call last week.

For PDC, Civitas and the two multinational giants, Chevron and Occidental Petroleum, that round out the state’s top four oil producers, 2022 has already been a record-breaking year — not because of any growth in production, which remains flat or modest, but because of high prices driven by Russia’s invasion of Ukraine and other factors.

After a wave of mergers and acquisitions over the last few years, these four companies now account for roughly 85% of Colorado’s oil production, nearly all of which takes place in an area known as the Denver-Julesburg Basin in the northeastern quarter of the state.

Encouraging permit flow

Publicly-traded oil producers across the country reported their second-quarter financials to investors over the last several weeks. And once again, despite consistent accusations from industry groups and their Republican allies that Democrats are holding back production, the earnings reports and conference calls — venues in which companies could face legal consequences for misleading the public — show that it’s Wall Street investors hungry for profits, not overbearing regulators, who are limiting the industry’s investment in new drilling.

As of Aug. 4, operators held a total of 1,345 active permits to drill, according to data from the Colorado Oil and Gas Conservation Commission. At least 235 of those permits had been issued in the past 90 days.

In its presentation to investors, PDC spoke of the “encouraging permit flow from COGCC,” a division of the Colorado Department of Natural Resources which oversees drilling across the state.

“The company has made tremendous progress obtaining permits in Colorado,” PDC CEO Bart Brookman told shareholders. “Ninety-nine new permits were approved in June alone.” Slides from a PDC Energy investor presentation show the company content with “permit flow” from Colorado oil and gas regulators, while touting their efforts to return capital to shareholders. (screenshots)

Despite benchmark oil prices that remain at $90 per barrel or higher — far in excess of the $75 figure much of the industry expected at the beginning of 2022 — PDC joined many other companies in continuing to assure investors that they plan to limit overall production growth to under 5% for the foreseeable future.

With hundreds of permits and drilled-but-uncompleted wells, or DUCs, in hand, PDC executives said that its drilling and production plan is set in stone through mid-2026, and expressed confidence that a comprehensive plan for another 450 wells will soon receive COGCC approval, further extending that timeline.

“The outlook for PDC remains incredibly strong,” Brookman said. “Our capital programs are on track. Our drilling projects are well mapped for the next several years, delivering substantial returns for our investors.”

As of last week, 21 drilling rigs were operating in Colorado, according to consulting firm Baker Hughes. That’s a new post-pandemic high, but still below the state’s average rig count of 31 between 2017 and 2019.

Profit record

Production levels in Colorado have closely tracked with industry-wide trends. Together, the five largest oil producers in the Western hemisphere — a group that includes Chevron — are still pumping about 10% less oil than they did before the pandemic, according to a Reuters analysis.

Chevron, which controls about 16% of Colorado oil production, reported late last month that its second-quarter profits tripled to over $11.6 billion, an all-time record. The company said it would invest $3 billion of that figure in new capital expenditures, while returning $5.3 billion to investors in the form of dividends and share buybacks.

It’s the same story across the industry, with companies facing intense pressure from Wall Street — which has a tighter grip on production after a frenzy of consolidation — to prioritize shareholder returns over reinvestment. PDC executives, too, assured investors that they would be “disciplined in our approach.”

“We remain committed to returning 60-plus-percent of our post-dividend free cash flow to shareholders via systematic share repurchases and special dividends,” Meyers said. “Again, look for the third quarter to be another strong share buyback quarter for PDC at these prices.”

Editor’s note: This story first appeared on Colorado Newsline, which is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Colorado Newsline maintains editorial independence. Contact Editor Quentin Young for questions: info@coloradonewsline.com. Follow Colorado Newsline on Facebook and Twitter.