U.S. markets closed
  • S&P 500

    4,246.44
    +21.65 (+0.51%)
     
  • Dow 30

    33,945.58
    +68.61 (+0.20%)
     
  • Nasdaq

    14,253.27
    +111.79 (+0.79%)
     
  • Russell 2000

    2,295.95
    +9.85 (+0.43%)
     
  • Crude Oil

    73.08
    +0.02 (+0.03%)
     
  • Gold

    1,779.00
    +1.60 (+0.09%)
     
  • Silver

    25.84
    -0.01 (-0.05%)
     
  • EUR/USD

    1.1942
    -0.0001 (-0.01%)
     
  • 10-Yr Bond

    1.4720
    -0.0120 (-0.81%)
     
  • GBP/USD

    1.3951
    +0.0003 (+0.02%)
     
  • USD/JPY

    110.6470
    +0.0120 (+0.01%)
     
  • BTC-USD

    32,477.42
    +907.74 (+2.88%)
     
  • CMC Crypto 200

    767.68
    -26.65 (-3.36%)
     
  • FTSE 100

    7,090.01
    +27.72 (+0.39%)
     
  • Nikkei 225

    28,884.13
    +873.20 (+3.12%)
     

Crude Rally Aids Big Oil's Shareholder Friendly Initiatives

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·5 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

After suffering heavy losses in the initial phase of the coronavirus outbreak, especially in the second quarter of 2020, when the energy sector was devastated by the pandemic-induced demand destruction and price plunge, some of the world’s biggest oil companies have now returned to profit. Their earnings and cash flows have been steadily improving, boosted by higher crude realizations and a recovery in consumption. 

Cash Flow Bonanza

While oil has come back strongly — from the depths of minus $38 a barrel in April 2020 — and reclaimed a more than two-and-a-half-year high above $70 yesterday, the sector components have reacted very positively to this robust investment landscape.

Cash from operations is on a sustainable path as revenues improve and the companies slash capital expenditures from pre-pandemic levels amid sharply higher commodity prices. To put it simply, the environment of strong oil prices has helped the big energy operators to generate significant “excess cash,” which they intend to use to boost investor returns.

Let’s have a rundown on how some of the oil biggies are allocating the increasing cash pile toward stock buybacks and dividends.

Share Repurchases

British energy major BP plc BP, which had a solid start to the year after comfortably beating first-quarter earnings estimates, has announced plans to start buying back shares. The company’s net profits surged on the back of trading gains and stronger commodity prices. BP managed to lower its net debt below its $35-billion target and consequently decided to launch stock repurchases worth $500 million in the June quarter. The company was forced to cut its dividend at the height of the pandemic-led crisis but reported a dramatic increase in first-quarter operating cash flow to $6.1 billion.

Upstream major ConocoPhillips COP recently delighted investors after announcing the resumption of share repurchases at an annualized level of $1.5 billion. Notably, ConocoPhillips has decided to commence selling out its 10% stake in Cenovus Energy (CVE) by year-end 2022, which began in the second quarter of this year. The fund will be allocated for incremental share repurchases. ConocoPhillips’ better-than-expected first-quarter results were due to increased production (primarily attributable to the takeover of Concho Resources) and realized commodity prices. The independent oil producer had to lower output over the past year in response to the COVID-induced shrinking demand scenario but implemented a symbolic penny hike in dividend in October.

Refining giant Marathon Petroleum recently announced plans to return cash to its shareholders including its intention to buy back $10 billion in common stock. This was after the company concluded the sale of its Speedway business comprising approximately 3,900 c-stores in 35 states to Japan-based retail group Seven &i Holdings — the owner of the 7-Eleven convenience store chain — for $21 billion. The after-tax cash proceeds of this deal are expected to be $16.5 billion.

Dividends

Marathon Oil MRO looks poised for strong free cash flow generation through the next few years. Importantly, the Houston, TX-based oil exploration company’s capital expenditure continues to fall as it keeps a tight leash on spending levels. In April, Marathon Oil lowered its gross debt by $500 million and raised its quarterly base dividend by 33%.

Norway’s Equinor ASA EQNR reported strong first-quarter earnings, buoyed by higher commodity prices and significant contributions from renewables. Importantly, it generated free cash flows of $5,170 million, increasing considerably from $362 million in the year-ago period. This allowed the integrated major’s board of directors to propose a quarterly dividend of 15 cents per share, representing a hike of 25% from the prior payout.

Larger rival Royal Dutch Shell RDS.A also boosted its quarterly dividend by about 4% to 17.35 cents per share — the second hike in six months after trimming its payout for the first time since World War II in April last year. The decision reflects the European biggie’s robust cash position. In the first quarter, Zacks Rank #3 (Hold) Shell generated cash flow from operations of $8.3 billion and raked in $7.7 billion in free cash flow.

You can see the complete list of today’s Zacks #1 Rank stocks here.

American supermajor Chevron CVX, which was able to sustain its dividend throughout the pandemic, recently raised it by 3.9% to $1.34 per share. The dividend aristocrat — on track for 34 consecutive years of annual increases — has reiterated its commitment to the payout on a number of occasions and has trimmed cost elsewhere. In the first quarter, the only energy representative in the 30-stock Dow Jones industrial average recorded $4.2 billion in cash flow from operations.

Some oil companies have also resorted to innovative dividend policies to use the additional cash generated from operations. EOG Resources EOG issued a $1 special dividend last month, while the likes of Pioneer Natural Resources Company and Devon Energy have plans to add a variable dividend component to their fixed payouts.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

Download FREE: How to Profit from Trillions on Spending for Infrastructure >>
 


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
 
BP p.l.c. (BP) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
Equinor ASA (EQNR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.