Two Shots of Happy - E&P Shareholders Reap Soaring Returns While Producers Boost Cash Balances

Champagne corks were popping in E&P boardrooms and executive suites over the past few weeks as they unveiled record-high second-quarter 2022 earnings and cash flows. The strong financial results in the near-idyllic quarter — pre-tax operating earnings and cash flows surged by 29% and 22%, respectively, from the already elevated Q1 2022 levels — were driven by soaring commodity prices and producers’ strict financial discipline. And the celebrations weren’t limited to E&P headquarters. Shareholders have also benefited as companies passed on the unprecedented largess to their investors. In today’s RBN blog, we analyze how U.S. oil and gas producers distributed their soaring free cash flows and discuss the underlying corporate strategies.

First, a little background. In Make It Rain, our blog on Q1 2022 cash allocation, we explained that for decades, investing in E&P companies had been high-risk growth bets because their fortunes — and capital spending — fluctuated wildly with commodity prices. But over the past few years, oil and gas producers have learned financial discipline and transformed themselves into cash-flow-generating machines that now offer some of the highest returns compared with any industry sector. In that blog, we used Warren Buffett’s investment in Occidental Petroleum (Oxy) as an example of a shrewd, long-term investor sinking cash into an E&P. Well, cash returns from the sector have continued to rise, and Buffett has increased Berkshire Hathaway’s stake in Oxy from 16% to over 20% and recently obtained approval from the Federal Energy Regulatory Commission (FERC) to increase its holdings to 50%.

Q2 2022 cash flow from operating activities (CFOA) for the 42 U.S. E&Ps we monitor justify investor interest, having surged from $29.5 billion in Q1 2022 to $44.3 billion. As shown in Figure 1, $23 billion (or 52% of CFOA) was allocated to dividends (light-blue slice in Figure 1 pie chart), share repurchases (yellow slice), and debt repayment (gray slice). Oil and gas producers also bolstered their balance sheets by adding a net $3.9 billion to their cash balances (green slice). The rate of reinvestment in “finding and development” capital expenditures dropped to 35% in Q2 2022 (dark-blue slice) from 47% in Q1 2022 as E&Ps’ production guidance for the year remained flat. Companies spent the remaining 4%, or $1.8 billion, on net property acquisitions (orange slice).

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