Champagne corks were popping in E&P boardrooms and executive suites over the past few weeks as they unveiled record-high second-quarter 2022 earnings and cash flows. The strong financial results in the near-idyllic quarter — pre-tax operating earnings and cash flows surged by 29% and 22%, respectively, from the already elevated Q1 2022 levels — were driven by soaring commodity prices and producers’ strict financial discipline. And the celebrations weren’t limited to E&P headquarters. Shareholders have also benefited as companies passed on the unprecedented largess to their investors. In today’s RBN blog, we analyze how U.S. oil and gas producers distributed their soaring free cash flows and discuss the underlying corporate strategies.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
First, a little background. In Make It Rain, our blog on Q1 2022 cash allocation, we explained that for decades, investing in E&P companies had been high-risk growth bets because their fortunes — and capital spending — fluctuated wildly with commodity prices. But over the past few years, oil and gas producers have learned financial discipline and transformed themselves into cash-flow-generating machines that now offer some of the highest returns compared with any industry sector. In that blog, we used Warren Buffett’s investment in Occidental Petroleum (Oxy) as an example of a shrewd, long-term investor sinking cash into an E&P. Well, cash returns from the sector have continued to rise, and Buffett has increased Berkshire Hathaway’s stake in Oxy from 16% to over 20% and recently obtained approval from the Federal Energy Regulatory Commission (FERC) to increase its holdings to 50%.
Q2 2022 cash flow from operating activities (CFOA) for the 42 U.S. E&Ps we monitor justify investor interest, having surged from $29.5 billion in Q1 2022 to $44.3 billion. As shown in Figure 1, $23 billion (or 52% of CFOA) was allocated to dividends (light-blue slice in Figure 1 pie chart), share repurchases (yellow slice), and debt repayment (gray slice). Oil and gas producers also bolstered their balance sheets by adding a net $3.9 billion to their cash balances (green slice). The rate of reinvestment in “finding and development” capital expenditures dropped to 35% in Q2 2022 (dark-blue slice) from 47% in Q1 2022 as E&Ps’ production guidance for the year remained flat. Companies spent the remaining 4%, or $1.8 billion, on net property acquisitions (orange slice).
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About the song
“Two Shots of Happy, One Shot of Sad” was written by Bono and The Edge as a tribute to Frank Sinatra in 1992. It debuted by U2 in a televised tribute for Sinatra's 80th birthday in November 1995. The song first appeared on record as the B-side of the single, “If God Will Send His Angels,” the fifth single released from U2's ninth studio album, Pop, in December 1997. It also appears on the digital box set, The Complete U2, released for download in November 2004. Nancy Sinatra recorded the song and it appears as the 11th song on her 12th studio album, Nancy Sinatra, released in September 2004. Personnel on the U2 version were: Bono (vocals), The Edge (guitar), and Craig Armstrong (orchestrations, conductor, arranger).
U2 is an Irish rock band formed in Dublin in 1976 by Bono (vocals), The Edge (guitars), Adam Clayton (bass), and Larry Mullen Jr. (drums, percussion). U2 has released 14 studio albums, one live album, three compilation albums, nine EPs, 83 singles, and 15 subscription-exclusive albums. The band has sold over 150 million records worldwide. U2 has won one American Music Award, 10 Billboard Music Awards, seven Brit Awards, two Golden Globe Awards, 22 Grammy Awards, four Ivor Novello Awards, and six MTV Video Music Awards. The band was inducted into the Rock and Roll Hall of Fame in 2005. U2 continues to record and tour.
