Oil companies have recently announced an increase in share buyback programs, supported by the highest annual earnings the industry has ever made.
The markets have cheered most of the repurchase plans of the energy firms, which now look to attract more investors and keep the current ones with attractive shareholder distributions and higher dividend and buyback yields.
The 2022 profits and cash flows of the energy companies came in at record highs, but this year’s earnings are expected to be lower, albeit still high by historical standards.
A marked economic slowdown or recession in Europe and/or the United States could lead to lower activity, tepid oil demand, and lower consumer spending. All these, analysts warn, could force some companies—including energy firms and banks—to halt or reduce the pace of share repurchases.
Energy Firms Lead European Share Buybacks Programs
In Europe, it was the energy sector, alongside banks, that have planned most of share buybacks out of the total $70 billion repurchases European companies have announced so far in 2023, according to data compiled by Bloomberg Intelligence.
But a sustainable buyback program would need a healthy economy to support earnings, which is not a given considering the signals from the Fed that more hikes to a higher level could be needed to curb inflation, analysts say.
“A prolonged multi-year trend of buybacks increasing in Europe requires global growth recovery which will help earnings,” Bank of America’s quantitative strategist Paulina Strzelinska told Bloomberg. Related: Russia Is Intent On Defending Its Oil Market Share In India
Energy sector buybacks could be vulnerable to sudden halts in the repurchase programs if the economy takes a turn for the worse. Per Bloomberg Intelligence, energy companies in Europe splurged a total of $43.6 billion (41 billion euros) on share buybacks in 2022.
The last time buybacks were halted and dividends were cut was not so long ago—in 2020, when the pandemic crushed oil demand. Back then, Shell cut its dividend for the first time since World War II to preserve cash and value in a highly uncertain macroeconomic environment.
Record 2022 Earnings Fuel Big Oil Buyback Ramp-ups
Just two years and a Russian invasion of Ukraine later, Big Oil smashed earnings records with the combined net profits of Exxon, Chevron, BP, Shell, Equinor, and TotalEnergies hitting $219 billion for 2022, up from around $100 billion booked for 2021.
Shell reported record adjusted earnings at $39.9 billion for 2022, double the earnings from 2021. The UK-based supermajor also announced a 15% dividend increase for the fourth quarter, as well as $4 billion in share buybacks, which are expected to be completed by the Q1 2023 results announcement in early May.
The other UK-based supermajor, BP, more than doubled its profit to $27.65 billion and announced a further $2.75 billion in share buybacks, bringing total announced share repurchases from 2022 surplus cash flow to $11.25 billion.
France’s TotalEnergies saw its net profit double in 2022 to a record $36.2 billion and confirmed a shareholder return policy for 2023 targeting a payout of 35-40%, which will combine an increase in interim dividends of more than 7% and share buybacks of $2 billion in the first quarter of 2023.
Norway’s Equinor reported adjusted earnings after tax of $22.7 billion for 2022, more than double the $10 billion earnings booked in 2021, and raised dividends and buybacks. On the back of strong earnings, outlook, and balance sheet, Equinor increased the $1.2 billion share buyback program by up to $4.8 billion, resulting in a program of up to $6.0 billion in 2023. Equinor’s total capital distribution for 2023, including share buybacks, is expected at $17 billion.
Big Oil looks to increase shareholder distribution and lift their share prices after years of poor market performance due to the Covid-related slump in demand and ESG investors shunning the oil and gas sector. Buybacks are a key part of increasing shareholder returns, the supermajors believe, despite criticism from the White House for the “outrageous” profits.
Companies are positioning for buying back shares through the commodity cycles, even if Brent prices drop to the $50-60 a barrel range, as evidenced by this week’s announcement from U.S. major Chevron, which raised its targeted annual share buyback rate to $17.5 billion.
“We’re winning back investors with consistent and growing cash returned to shareholders across the commodity price cycle,” Chevron’s CFO Pierre Breber said in a statement.
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On the investor day call on the same day, Breber said, “As we’ve said consistently, we intend to buy back shares across the commodity cycle, using surplus cash on our balance sheet and excess debt capacity to continue buybacks even when oil prices cycle down.”
In an effort to offer more value to shareholders, Chevron said it was raising its share buyback guidance range and rate.
“We expect to have the capacity to continue to return more cash to investors in the years to come,” Breber said.
“Commodity prices and margins are uncertain. Our approach to returning cash is not.”
By Tsvetana Paraskova for Oilprice.com
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