Each quarter, most publicly traded companies discuss their quarterly results on an accompanying conference call. These calls can provide investors with insights into the company's strategy, industry, and outlook. They're often filled with useful nuggets of information.
With that in mind, we asked our energy industry contributors what conference calls stood out to them this quarter. They think investors won't want to miss what the CEOs of The Southern Company (SO 0.90%), ConocoPhillips (COP -0.43%), and Pioneer Natural Resources (PXD 0.10%) had to say about their results and outlooks this quarter.
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More nuclear problems...
Reuben Gregg Brewer (The Southern Company): U.S. utility giant The Southern Company is the only company in the country building nuclear power plants. The Vogtle project, as it's known, got off to a rough start, including delays, cost overruns, and the bankruptcy of its main contractor, Westinghouse. Southern eventually took over the oversight of the project. Things started to get better, but then the coronavirus pandemic upended things in 2020.
The project has again been delayed and costs have gone up again. This is not good news and it has resulted in a second-quarter after-tax charge of $343 million. Southern is now expecting to bring the first of the two nuclear plants under construction at Vogtle online by mid-2022, with the second plant by the end of the first quarter of 2023. These are not small delays, but given the current headwinds it is hard to suggest that the utility is 100% at fault for what is going on. Management is, in the end, doing the best it can in a bad situation. And it's worth remembering that, when complete, the plants will provide zero-emission (or clean) power for decades into the future.
For investors, meanwhile, the other news from the quarter was pretty good. During The Southern Company's second-quarter 2021 earnings conference call, management noted that demand has nearly recovered from the pandemic and new customer growth has been strong. In short, the big story from second-quarter earnings is that the company is executing well even as it deals with a complex and difficult construction process. Yes, the Vogtle update was bad, but the investment-grade rated utility should be able to handle the headwinds and keep rewarding investors well with its 4% dividend yield.
Want a dividend raise? Hear this
Neha Chamaria (ConocoPhillips): ConocoPhillips' second-quarter numbers trampled estimates, as its revenue surged 154% year over year and it earned adjusted earnings of $1.27 per share versus a loss of $0.92 per share in the year-ago period. It was, in fact, ConocoPhillips' best quarterly earnings in nearly three years.
ConocoPhillips generated $4 billion in cash from operations, $2.8 billion in free cash flow, and ended the quarter with cash, cash equivalents, and a short-term investments balance of nearly $8.8 billion. That's a lot of money, and it miffed investors when ConocoPhillips didn't boost its dividend despite having so much idle cash.
Unsurprisingly, one question lingered throughout ConocoPhillips' Q2 earnings conference call: What was it planning to do with the cash pile? In reply, CEO Ryan Lance explained the company prefers to hold some cash as a cushion against potential volatility given that demand for oil is yet to hit pre-pandemic levels. Lance also recalled how ConocoPhillips had to cut its dividend after the oil market crash in 2015, and this time around it wants to ensure its "dividend is reliable, it's consistent, it's predictable, it's transparent, it's growable over time, and it works through the cycles."
I'm not arguing with Lance's rationale. Focusing on cash flows and the balance sheet can go a long way in helping an oil and gas company ride out economic cycles. Also, it's not that ConocoPhillips doesn't want to pay larger dividends. Rather, it wants to pay stable and sustainable dividends, and is committed to returning at least 30% of cash from operations to shareholders. If that isn't enough to convince investors in this 3%-yielding stock, something else Lance said should: Management expects to return any incremental cash flows the company earns henceforth at current oil prices to shareholders.
The shale growth days are over
Matt DiLallo (Pioneer Natural Resources): The U.S. oil industry has experienced phenomenal growth over the past decade. Thanks to technological advances, oil companies have been able to tap oil and gas resources trapped in tight shale formations, unlocking a treasure trove of new production.
However, the industry is shifting gears, given the accelerating transition to cleaner energy sources. Instead of aiming to grow production as fast as possible, many companies are planning to return the bulk of their free cash flow to shareholders through share repurchases and dividends.
This strategy shift has big implications. Scott Sheffield, CEO of Pioneer Natural Resources, discussed what this means for production growth on the company's second-quarter conference call:
As more companies deliver their free cash flow model, they can't change it. So just like Diamondback committed to 50%; the Cabot Cimarex merger is committed to 50%; Devon was committed to 50%. So more and more companies, whether they commit to 50% or 75%, they're not going to change. And so I'm getting more comfortable with the fact they're just not going to grow that much U.S. shale.
As Sheffield points out, oil companies from Diamondback to Devon to Pioneer have all publicly committed to returning at least half of their free cash flow to shareholders in the coming years. Because of that, they're not retaining that much money to drill more wells. Thus, it seems unlikely that the industry will grow its production very much in the coming years.
That should take some of the pressure off of oil prices, enabling them to stay relatively high. As a result, these producers would generate a gusher of cash to return to their shareholders in the coming years, making them potentially attractive options for income-seeking investors.
