Belt-tightening has been the policy of necessity in the oil industry over the past three years, and even the price recovery that began at the end of 2016 did not steer oil majors completely off their new frugal course. Shareholders, it seems, are more than happy about it.
It might come as a surprise that the best-performing stock among large U.S. oil producers is ConocoPhillips. In the past 12 months, Conoco’s share price gained almost 30 percent as opposed to an almost 10-percent slide for Exxon. This, says the Wall Street Journal’s Bradley Olson, is proof that Conoco’s choice to pamper investors with dividends and stock buybacks instead of growing its business is the right one.
Conoco began doing this before the 2014 price crash, interestingly enough. Starting in 2012, the company offloaded its refining operations and shut down its deepwater exploration unit, Olson recalls, as it sought to focus on its core upstream business and generate more free cash flow to share with its investors.
What Conoco did was, in hindsight, close to clairvoyance. The company’s management devised the streamlining, higher-cash, and higher dividend strategy on the grounds of a belief that the shale revolution will heighten market instability. Indeed, this is what we all witnessed recently enough for the memories to be still fresh. Conoco and others that focused on frugality are now reaping the benefits—and not just in terms of share price developments. Related: Total Deploys First Robots To North Sea
Conoco’s sustaining cost per barrel is US$40. This means that with WTI at US$60, the company ends up with extra, which it can then distribute to shareholders. No wonder its shares outperformed everyone else’s.
Something similar is happening in shale oil as well. Oilprice’s Nick Cunningham wrote earlier this week that as shale oil producers begin returning more cash to shareholders, their stock price begins to rise. The trend was a result of a combination of factors, chief among them the new financial discipline and cost-cutting efforts, alongside the growing disgruntlement among investors that they have yet to see any meaningful returns on their investments in shale oil.
It seems that investors have changed just like the companies. Before, they eyed the plump dividends that would come from higher production and more sales as demand for oil rose every year, unabated by renewable energy alternatives. Growth was the word. But then the tables turned, oil prices sank, and Big Oil started issuing new stock instead of dividends to keep investors on board. Related: An Oil Price Rally Is Likely
Now shareholders don’t care so much about ever-higher dividends. They care about business sustainability and guarantees of returns. They care about the share buybacks that almost a dozen oil producers in the United States—plus a few supermajors—have announced since the start of this year. The buybacks signal a return to income growth; they promise dividends.
Shareholders have become conservative and are likely to remain conservative at least over the medium term as the oil price heights from the early 2010s are unlikely to make a second appearance. This conservatism could actually become more of a permanent fixture of the industry in the long run as fossil fuels slowly but surely yield ground to renewables and the oil industry adjusts to this transformation.
By Irina Slav for Oilprice.com
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