Unconventional-natural-gas business: TSR benchmark and recommendations for prudent management of shareholder value

Stock-listed independents have played a leading role in the development of unconventional natural-gas resources in the United States and Canada. Shareholders have provided up to 57% of the total capital tied up in a representative panel comprising the 20 leading US and Canadian operators. The accumulated equity-financed capital also provided the collateral for the complementary 43% debt financing. Prudent management of shareholder value in unconventional-gas businesses is therefore essential for ensuring security of gas supply, not only in North America, but also in other countries with emergent unconventional gas plays. This study analyzes and benchmarks the working capital cycles in unconventional-gas companies. The working capital and cashflow cycles are compared with those of diversified oil and gas majors. The ability to accumulate retained earnings is generally much lower for unconventional-gas producers than for integrated majors. Unconventional-gas producers tend to grow their share capital by new issues and not from economic value added by profit from business operations. Although little or no asset value is built from economic profit, shareholder returns may still grow for unconventional-gas companies as long as investor expectations remain positive about future earnings. In contrast, shareholder returns in conventional-gas companies come from genuine economic value added in profitable business operations. The root cause of the weakness or absence of operational profits in unconventional-gas operations is a combination of low gas prices and well flow rates that are too modest to pay for the total cost of the unconventional-gas production. The operating margins for unconventional-gas companies are either close to zero or negative, but not for the integrated oil and gas majors, which have impressive cash margins even at globally suppressed gas prices. The benchmarks provided here help one to understand which parameters impact the financial performance of unconventional-natural-gas companies most significantly. Recommendations are formulated to avoid the destruction of shareholder value, and to instead maximize total shareholder returns (TSRs).