According to the World Wildlife Fund, the Javan rhino and the Amur leopard top the global list of most endangered species. Broadening the scope, in 2014-20 we probably would have added the E&P investor to the list, as shareholder returns plunged deep into negative territory for seven consecutive years on volatile commodity prices and massive industry overspending. Almost miraculously, a combination of higher prices and a strategic shift to distribute cash flow to equity holders resulted in record shareholder returns that brought investors back into the fold. However, weakening prices and significant increases in investment have dramatically shrunk returns this year. As we discuss in today’s RBN blog, total shareholder returns in 2023 were mixed: good for gas-focused E&Ps but less so for diversified and oil-focused producers.
First, a quick definition: Total shareholder return (TSR) is a measure of financial performance that calculates the total amount that a stock returns to those who invested in it over a specified period — in our analysis, that period is from the end of 2022 to December 15, 2023. TSR is expressed as a percentage, and is calculated by summing the capital gain or loss from the rise or fall in the stock price and the dividends paid, then dividing that sum by the stock price at the beginning of the period.
As shown in Figure 1, annual E&P shareholder returns went from minimally positive to disastrously negative in the decade preceding 2021, driving all but the most masochistic (or pig-headed) investors out of the industry as share prices plunged more than 90%. Then, the E&P sector swore off its growth-at-all-costs mantra and transitioned to a maintenance capital spending strategy to maximize cash flow to repay debt and reward long-suffering shareholders with dividends and share repurchases. The industry quickly won back investors in 2021-22 as cash flows fueled by higher commodity prices post-COVID sent dividends soaring. As a result, the combination of rising equity prices and higher dividends boosted total shareholder returns to record levels.
Figure 1. Total Return S&P E&P Index 2010-23. Source: Bloomberg
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