North American energy producers survived the recent oil bust in large part by selling more than $60 billion of new stock. Now they're beginning to buy it back.
Several oil and gas producers, including Pioneer Natural Resources Co. (PXD) and Anadarko Petroleum Corp. (APC), have started the year by initiating or enlarging share-repurchase programs. The buybacks reflect oil prices that have climbed enough for them to drill profitably and shareholders who have urged companies to focus more on the bottom line.
It also suggests that energy producers think their shares, which have lagged behind the broader market, are underpriced.
Buying back stock reduces the number of shares in the market, boosting the value of those remaining. Doing so is a reversal from the past three years when energy producers pumped new stock into the market to raise cash so they could pay down debt and keep rigs drilling.
Newly reduced corporate tax rates aren't behind these buybacks. Energy producers were already able to write off much of their exploration and drilling costs and few are expected to produce much taxable income this year.
They are related to higher oil prices and asset sales. Crude prices are up more than 45% since June to $61.68 a barrel. While prices have dropped off 6.74% from January's highs on data suggesting that shale drillers will produce more oil than ever this year, they are still in a range not seen since late 2014. At the time a flood of shale oil had sent prices spiraling from more than $100 to as low as $26. The crash forced producers to reduce costs and restructure debt-laden balance sheets.
Companies and investors were prompted to rethink the strategy of boosting output no matter the cost, which had typified the shale boom.
"The general tone has changed," said Jake Fells, senior analyst at BTU Analytics. "You're seeing a focus on shareholder return."
Pioneer, one of the country's most prolific oil producers, said it would quadruple its semiannual dividend to 16 cents a share and buy back $100 million of its shares to negate the dilutive effects of a similar amount of stock awarded this year to employees. That is a small amount relative to the nearly $2 billion of new stock it sold to bolster its balance sheet during the downturn, but some investors view the move as one made with shareholder returns at top of mind.
"It's a good sign—their alternative was to add another rig, and they didn't," said Craig Bethune, senior portfolio manager at Manulife Asset Management. "I don't think we need the extra growth."
Yet there is another view. Sanford C. Bernstein & Co. analysts say that because Pioneer has proven it can be "solidly profitable" drilling its West Texas fields, they come down on the other side of the "return on capital versus return of capital" debate: "Pioneer has earned the right to reinvest its cash flow."
Generally, the buyback announcements have been applauded. Barclays analysts boosted their price target for ConocoPhillips (COP) to $72, from $59, after the company said it would buy back $2 billion worth of its shares, up from an earlier plan to take $1.5 billion off the market.
Similar plaudits have followed Anadarko's announcement that it would boost an earlier announced buyback budget to $3 billion, from $2.5 billion, as well as Suncor Energy Inc.'s (SU) disclosure that it had authorized a buyback of 2 billion Canadian dollars (US$1.6 billion) to begin in May, when its previously announced repurchase program of the same size expires.
Anadarko and Suncor produced two of the largest follow-on stock offerings of the bust, each selling about $2.2 billion in 2016.
Derek Rollingson, an energy portfolio manager at Icon Advisers Inc., said it is a good time for companies to buy their shares, which are trading at multiyear lows for some, despite the run-up in the broader stock market and oil prices. "There's been this disconnect between the equity prices and the commodity prices," he said.
Laredo Petroleum Inc. Chief Executive Randy Foutch said last week that buying back as much as $200 million of the Tulsa, Okla., company's stock was the "most compelling and accretive" way to put money in shareholders' pockets following the sale of its stake in a Texas pipeline system. Laredo's shares are trading more than 20% below what the company sold stock for in three offerings during the downturn.
Noble Energy Inc. (NBL) and Gulfport Energy Corp. (GPOR) are likely to buy at even bigger discounts to what they sold shares for in recent years. Noble said last week it would use proceeds from the sale of its Gulf of Mexico fields to repurchase $750 million of its stock, which is trading about 45% below the $47.50 its shares fetched in a $1.15 billion offering three years ago. Gulfport said it plans to buy back $100 million of the stock it sold at prices ranging from $21.50 to $47.75 in four offerings between April 2015 and December 2016. The Oklahoma City company's shares ended Friday at $8.75.
|For more news you can use to help guide your financial life, visit our Insights page.|