The 43 large U.S. E&Ps that we monitor posted record earnings in 2021 and tripled their cash flow — an extraordinary turnaround from a very tough 2020. But as big a story, at least for investors, is how those oil and gas producers are allocating their surging cash reserves. Their dramatic strategic transformation from growth at any cost to maximizing returns is expected to result in 2022 yields approaching 10% for some E&Ps, rates higher than the much broader S&P 500 sector and more than double the payouts of the oil majors, the former dividend kings. In today’s RBN blog, we discuss the cash-flow allocation of the major E&P companies and explain what it means for investors.
For more than a decade after the onset of the Shale Revolution, oil and gas producers concentrated on growth, grabbing vast swaths of acreage and spending aggressively on delineation and building out infrastructure. Industry capital expenditures significantly exceeded 100% of cash flow from operations to meet double-digit production growth targets. The spending typically was funded either by debt or stock issuances that diluted shareholder equity. Dividends were either insignificant or non-existent. Today’s cash allocation couldn’t be more different. The 43 major publicly traded E&Ps that we follow have slashed the percentage of reinvested cash flow to just 43% and are targeting flat to low-single-digit production growth. Base dividends that are competitive with other industry sectors are being significantly augmented by additional variable dividends that represent an another 30% to 50% of cash flow. Instead of issuing equity, some producers are further boosting shareholder returns through stock-buyback programs. Others are pursuing “shareholder friendly” allocations to debt reduction or growing cash reserves.
Major Permian producer Pioneer Natural Resources exemplifies this transformation. When WTI prices last exceeded $100/bbl in 2014, the company outspent cash flow from operations by nearly $900 million and continued that overinvestment over the next few years. Production grew 30% between 2014 and 2016, but the company’s share price declined from as high as $230/share in June 2014 to $140/share on January 1, 2016. Pioneer’s shareholders received an annual dividend of $0.16/share, which represented a less than 0.1% yield. Since then, the company’s reinvestment rate has plunged to an estimated 33% of forecast 2022 operating cash flow of $10.5 billion. Pioneer has increased its base dividend by a compound annual rate of higher than 80% over the last six years, with the annual payout now at $3.12/share (1.2% yield). In addition, the company is committing 75% of free cash flow to pay an additional $3.00/share variable dividend in the first quarter of 2022, which represents a total yield of 6%. Pioneer projects a total dividend payout of more than $20/share for 2022, which represents an approximately 8% yield. The E&P’s board has also recently authorized $4 billion in share repurchases.
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