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Oil Stocks Continue Putting Their Oil-Fueled Windfall to Work

Matthew DiLallo, The Motley Fool

For the last few years, oil companies have been pinching their pennies due to lower oil prices. Because of that, many had to slow the flow of money heading back to their investors via dividends and buybacks. However, with crude soaring in recent months, oil producers are flush with cash. That's giving them a windfall to allocate, with many sending a growing portion of it back to shareholders.

Replenishing the program

Anadarko Petroleum (NYSE: APC) is one of several oil producers that have steadily ramped up cash returns to investors as oil prices have improved. The company started opening the taps for investors last September by announcing plans to return a portion of the cash it built up during the downturn via a $2.5 billion share buyback program. At the time, that was enough to retire 10% of its outstanding shares.

A barrel of oil coming through money.

Image source: Getty Images.

However, with oil prices rising sharply this year, Anadarko has increased the amount of money it plans on returning to investors. In February, the company tacked on $500 million to its share repurchase program, and it announced a fivefold increase to its dividend, boosting it up to $400 million per year. On top of that, the company said it would retire $1 billion in debt as it matured over the next two years.

Anadarko made quick work of that buyback, repurchasing the entire $3 billion by the end of the second quarter. So the company recently replenished the program by adding another $1 billion. On top of that, the company added $500 million to its debt retirement program.

These increasing cash returns have helped fuel significant gains for shareholders over the past few months: Anadarko's stock is up a jaw-dropping 64% since announcing the initial buyback last September. For comparison, the average gain of energy stocks in the S&P 500 is just 13% over that time frame.

Raising the ante

Several other oil companies have also steadily increased cash returns to shareholders in the last year. ConocoPhillips (NYSE: COP), for example, initially expected to repurchase $3 billion in stock through 2019. But after selling a boatload of assets last year, the company bought back that entire amount in 2017. So the company said it would buy back $1.5 billion per year through 2020, increasing its overall authorization to $7.5 billion. However, thanks to improving oil prices, the company has already boosted 2018's buyback by $500 million -- along with increasing its dividend 7.5%. And it could raise its repurchase authorization again given where crude prices are these days, and the fact that the company is on pace to achieve its debt-reduction target a year early.

Hess (NYSE: HES), likewise, started off with a smaller buyback authorization, setting a $500 million repurchase program last November. However, thanks to higher oil prices, Hess added $1 billion to that authorization earlier this year. With oil continuing to rise, Hess could further expand its buyback authorization.

These buybacks have paid off for investors. The stock prices of both Hess and ConocoPhillips are up more than 60% in the past year, while the average energy stock in the S&P 500 has only gained about 18%. 

Buybacks could continue fueling big-time gains

Thanks to improving market conditions, oil producers have been steadily pumping more cash out to their shareholders over the last year, which has done wonders for their stock prices. Because of that, more producers will likely follow their lead, especially since oil's climb shows no signs of slowing down. While several could benefit from authorizing a buyback, here are three that seem like they would have the most upside from a repurchase program given their poor performance so far this year.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.