The saying goes, “If you got it, flaunt it,” and the rise of social media has certainly accelerated the ostentatious display of sudden wealth by rock stars, rappers, tech billionaires, star athletes and others. While it might be unseemly for executives at oil and gas companies to indulge in bling from gold chains to $400,000 Maserati GranCabrios to half-billion-dollar mega-yachts, they weren’t shy about displaying their companies’ financial gains last year from surging commodity prices in the form of lavish shareholder returns that in some cases dwarf returns from the traditional dividend giants. In today’s RBN blog, we’ll detail the extraordinary 2022 returns allocated to oil and gas investors and discuss the warning signs that 2023 will be a leaner year.
The saga of U.S. E&Ps may not be a classic rags-to-riches story, but there is no doubt the industry endured a brutal seven years from the 2014-15 downturn in crude oil prices to the pandemic-induced plunge in both demand and commodity prices in 2020. Investors jumped ship as the S&P E&P stock index plummeted 88% from a high of over 12,600 in mid-2014 to just 1,500 near year-end 2020. As cash flows from surging commodity prices began to refill their coffers in 2021, E&Ps initially made the fiscally responsible decisions to gradually restore capital investment to at least maintain production and reserves while paying down excessive debt. But their main focus was on winning back their “fans” — investors — by substantially boosting shareholder returns.
As shown by the blue bars and left axis in Figure 1 below, over the past nine years the 41 oil and gas E&Ps we track have sharply reduced their reinvestment rate in a major shift away from their historical “growth at any cost” strategy. In 2014 and 2015, our group of companies invested more than 100% of cash flow, supplementing cash deficits with debt and common stock issuances. Then, in the 2016-19 period — and in concert with declining oil and gas prices (the orange line and right axis in Figure 1 show each year’s average price for WTI) — the companies reduced capex to about 70%-90% of cash flow as they wrestled with inflated balance sheets by paying down debt. The increased financial discipline helped producers survive the severe plunge in commodity prices in 2020. The strong and unexpected surge in realizations in 2021 more than doubled the E&Ps’ collective cash flow from operations to $89 billion from $41 billion in 2020.
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