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Crude Rally Aids Big Oil's Shareholder Friendly Initiatives

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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 - Free Report) , 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 - Free Report) 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 - Free Report) 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 - Free Report) 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 - Free Report) 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 - Free Report) , 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 - Free Report) 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.

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