The return of $70/bbl WTI raises an important question: With a lot more cash flowing in, will public E&Ps maintain the financial discipline they’ve tried to live by since the crude oil price crashes of 2014-15 and, more recently, the spring of 2020? We’ve said it before, but it bears repeating that many producers once prided themselves on the riverboat-gambling nature of their business but, after a major scare or two, came to adopt a far more conservative approach to investment based on their new 11th commandment: “Thou shalt live within cash flow.” Emerging from the pandemic, E&Ps’ 2021 capital investment announcements guided to maintenance-level outlays designed to maximize free cash flow for debt reduction and returning cash to shareholders through dividends and share repurchases. Still, old habits die hard, right? So, when oil prices strengthened and cash flow soared in the first few months of 2021, we wondered if producers would give in to temptation to reap short-term benefits from their accelerating output. Today, we analyze the actual first quarter cash-flow allocation of the 39 E&P companies we monitor and compare it with the deployment of cash flow in 2019 and 2020.
In our analysis, we looked at the cash flow from operations, cash flow from investing, and cash flow from financing sections of the cash flow statement contained in each company’s SEC filings. The results showed that E&Ps invested at least as conservatively as they had indicated in their previous financial guidance. As shown in Figure 1, just 57% ($8.9 billion; blue slice) of the $15.5 billion in cash flow generated from operating activities by the 39 public producers we track went to capital spending, including acquisition outlays and net-of-asset sale proceeds, yielding $6.5 billion in free cash flow. Another 29% ($4.4 billion; orange slice) was applied to debt reduction, net of new borrowings; and 14% was returned to shareholders, 11% ($1.7 billion; yellow slice) as dividends and 3% ($439 million; gray slice) for share repurchases net of equity issuances.
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