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Take It Easy - E&P Shareholder Returns Stall Despite Higher Cash Flows As Caution Prevails

Despite dreams of a white Christmas and a “soft landing” for the U.S. economy, there’s a lot going on in the world — much of it upsetting and even gut-wrenching. As for energy, crude oil prices have been sagging after a brief rise and natural gas prices, while up from their lows, remain less than stellar — and it seems things could get far worse in the blink of an eye. All of that has combined to make folks cautious and wary, and that’s impacting how oil and gas producers spend — or hoard — their money. In today’s RBN blog, we analyze U.S. E&Ps’ increasingly conservative cash allocation despite rising returns in Q3 2023. 

In After the Gold Rush, we documented a 15-month decline through Q2 2023 in the operating income and pre-tax operating cash flows of the 41 oil and gas producers we covered in that analysis. Rising capital expenditures sopped up 76% of cash flows in Q2 2023, nearly double the reinvestment rate of a year earlier, which left just $6.6 billion in discretionary funds for allocation. It’s no surprise that remittances to shareholders fell 34% from the previous quarter to a level less than half the peak in Q2 2022. Share repurchases — the most discretionary of expenditures — plunged to $3.8 billion from $7 billion in the previous quarter and a high of $10.9 billion in Q4 2022. Dividends, both fixed and variable, fell to $5 billion from $6.4 billion in the previous quarter and a high of $8.7 billion in Q3 2022. That still left a $2 billion shortfall, which producers met by increasing debt.

Fortunately, as we recently discussed in Baby Come Back, E&Ps saw a 13% increase in average realized prices in Q3 2023 — including a healthy $82/bbl for WTI (right end of orange line and right axis in Figure 1). The resultant rebound in earnings and cash flow for our universe of producers exceeded expectations, with pre-tax income rising 42% and cash flow from operating activities (CFOA) increasing 17% to $30.1 billion. As we predicted in that blog, management also put the brakes on capital expenditures after a 44% increase since Q1 2022, holding outlays flat with the preceding quarter at $19.4 billion. That decreased the reinvestment rate to 65% (blue bar to far right and left axis) and increased free cash flow (FCF) to $10.7 billion, $4.1 billion, or 62%, higher than Q2 2023.

E&Ps’ Reinvestment Rate, 2014-Q3 2023

Figure 1. E&Ps’ Reinvestment Rate, 2014-Q3 2023.

Source: Oil & Gas Financial Analytics, LLC 

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