Investors Reap Rewards of US Cash Flow Bonanza

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Oil may be losing its grip on $80 this week, but one would be hard-pressed to find any complaints about current oil prices among US producers — or their investors.

Benchmark US crude prices remain at levels not seen in seven years, and this year’s run-up from sub-$50 West Texas Intermediate at the end of 2020 to north of $70 per barrel has graced the US oil patch with an abundance of cash.

The roughly 20 US producers tracked by Energy Intelligence culled nearly $100 billion in cash from their operations during the first nine months of the year.

Leading US Producers Embrace Capital Discipline, Shareholder Returns
($ million)Cash Flow From OperationsCapexDividendsFree Cash FlowReinvestment RatioShare Buybacks
Exxon Mobil31,00510,78711,1619,05735%0*
Marathon Oil2,093781941,21837%200
SM Energy678553212382%0
TOTAL99,323 37,385 26,234 35,704 38%3,409

In the past, most of that windfall would have gone back to the drill bit.

But this time, the group has put less than 40% of its incoming cash flows into capital expenditure, as surplus Opec-plus spare capacity, still-lingering Covid-19 impacts on global oil demand and shareholder demands for returns-first strategies all work to suppress spending.


More than one-quarter of those cash flows have instead gone to dividends, as companies reinstate and raise continual payouts to entice battle-weary investors back to oil and gas.

Robust oil prices also led to hefty additional variable dividend payments at the likes of Pioneer Natural Resources and Devon Energy, while EOG Resources added a second special dividend for the year.

Even debt-beleaguered APA (formerly Apache) has raised its base dividend twice this year — although payments are still half as small as they were prior to the pandemic.

Buyback Uplift

If higher dividends are the shot offered to investors, share repurchases are the chaser.

Dividend cuts are a tool of last resort to reduce financial obligations when markets crash, so companies are mindful about how far and fast they raise dividends.

But investors are nonetheless clamoring for a piece of the more than $35.7 billion in free cash flow the group accumulated during the January-September period this year after capex and dividends were funded. Buybacks are seen as a flexible way to do just that.

Seven of the 19 producers tracked by Energy Intelligence already bought back shares during the first nine months of 2021. But more tellingly, more than 60% of the group is poised to fund repurchases moving forward — including Exxon Mobil, the last of the majors to do so.

Some of the buyback programs are substantial. Devon, for instance, is looking to spend the equivalent of 4% of its market capitalization.

Smaller independent Magnolia Oil & Gas only launched its first dividend in August, but the company felt comfortable spending 40% more on buybacks than it has on capex so far this year. The company has reduced its share count by 9% in the process.

Balance Sheet Rebuild

Showering investors with returns isn’t the only call on excess capital. Debt repayment is also a top priority.

The US shale sector earned its reputation for capital destruction by packing on debt to fund growth with little, if any, attention paid to returns.

Although the industry had begun to see the error in its ways before the pandemic-led downturn, the depths of the financial pain caused by the unprecedented market collapse forced producers to expedite their balance sheet repair efforts as soon as oil prices showed signs of recovery.

Industry consolidation makes it difficult to track the group’s debt trends over a longer period, but the past few months alone make it clear that US producers are looking to exit the downturn in stronger financial shape than many have ever been.

Energy Intelligence found that between end-March and end-September, the group reduced their net debt by more than $31 billion — a 15% decrease in just six months.

Earnings, Equity and Debt Markets, Corporate Strategy , Independent E&Ps, Majors
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