Big Oil spent years chasing growth. Now it is in a new race—to see how quickly it can return cash to investors’ pockets.
That quest took a back seat for energy investors last year when the pandemic sent oil demand and prices plunging. The largest U.S. integrated companies, Exxon Mobil and
attracted as much criticism as praise for maintaining cash payouts to retain their Dividend Aristocrat status. For Exxon, dividends were so sacred that it funded them by raising more debt. In fact, the company had been unable to fund its dividends through free cash flow alone even in 2019 before the pandemic.
While dividends took center stage last year, share repurchases were prodigious during happier times for the industry’s giants. Exxon has spent more than $250 billion on share buybacks since 2000, the year following the close of the merger with Mobil, reducing its share count by almost 40% during that time. Chevron has reduced its total share count by almost 10% since 2001, the year it merged with Texaco.
The sector’s ability to restart buybacks will depend on how quickly balance sheets heal, but the race for investors’ love already is under way.
was the first to reinstate share repurchases, announcing on March 10 that it has resumed buybacks totaling $1.5 billion a year. That is still a marked decline from the $3.5 billion worth that it made in 2019, but it throws down a challenge to peers.
Cash returns already are at the front of investors’ minds given the perception that oil demand in particular is thought to be near its peak. During its investor day held March 9, Chevron fielded multiple questions regarding when it would resume its buyback program in earnest. While the company didn’t give a definitive timeline, Chief Financial Officer
Pierre Breber
said a program wouldn’t resume until the company is confident it can sustain it for multiple years. Though Chevron is expected to generate enough free cash flow to cover dividends in the first quarter, it won’t have a substantial sum left over.
Exxon has even less wiggle room. Its debt ballooned by $20 billion over the course of 2020 to its highest level since at least its merger with Mobil more than 20 years ago. Its free cash flow isn’t expected to return to levels that can fully cover its dividend until the third quarter of this year.
one of the largest independent U.S. exploration-and-production companies, also has said it would give priority to debt reduction before looking at share repurchases or supplemental dividends.
Still, free-cash-flow expectations seem to be recovering at a faster pace than oil prices, helped by muted capital expenditures. Exxon expects up to $19 billion in capital expenditures this year, a clear step down from its 10-year average of $29.4 billion. As a result, free cash flow is expected to rebound fairly quickly to $15.3 billion this year, a level last seen in 2018 when the annual Brent crude average price topped $70 a barrel. For 2021, the U.S. Energy Information Administration expects Brent to average $60.67 a barrel.
Chevron plans $14 billion in capital expenditures, also a marked decline from its 10-year average of $25.5 billion. Its full-year free cash flow is expected to be $16.6 billion, recovering to 2018 levels. Analysts expect EOG Resources’ free cash flow this year to be almost double what it was in 2018.
“Grow slowly, generate free cash flow, and give that back to investors. That’s the mantra that is selling well with investors,” said
Michael Bradley,
managing director at energy-focused investment bank Tudor, Pickering, Holt & Co. Investors who used to pay attention to valuation multiples such as price/earnings ratios are now more focused on free-cash-flow yield, Mr. Bradley noted.
With the petroleum age clearly past its peak, investors are looking for companies that can treat them well on the long, slow ride down.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
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